Since March 2020, Australian shares have since risen 42%. Bonds rose by 5% and gold is down 8%.
This means that our March 2020 rebalancing has already added between 1% and 1.9% in portfolio returns.
It’s hard to predict rebalancing because it depends on the performance of each of the asset classes and when they were purchased. In 2020, we’ve rebalanced twice but many years we don’t rebalance at all.
The reason for rebalancing twice in 2020 was due to the market crash in March, when we sold gold and bought more Australian shares for many clients. Since March 2020, Australian shares have risen sharply, and the Australian shares component of many Stockspot portfolios rose above the target level. Meanwhile, since March 2020, the bonds and gold components of many Stockspot portfolios have fallen.
Rebalancing in November 2020
The latest dramatic market movements have led to further rebalancing of some client portfolios to get them back towards their target investment mix.
Our late November rebalancing strategy has generally involved selling some Australian shares and buying some gold and/or bonds over the past few days. This is the opposite of what we did in March.
It may seem counterintuitive that we would be selling Australian shares after rising 10% in November and having their best month since 1988. Rest assured that this is exactly what should be happening in order to get your portfolio risk back to its target level.
Remember, the market price of most assets already includes all known information, including the current positive outlook for a COVID vaccine. In March, when we were buying shares, the market price reflected consumer and corporate negativity.
To minimise risk in your portfolio, we adhere to investing principles, instead of strategising based on market sentiment.
Why do we rebalance?
When you invest with Stockspot, your initial portfolio allocation has a certain percentage in defensive assets like bonds and gold, as well as growth assets like shares.
During the recent market rally, growth asset values have risen in price while defensive assets like gold have fallen. This has led to the growth part of some portfolios increasing as a proportion of your overall portfolio. In this scenario, your portfolio is becoming higher risk. If left unchecked, a portfolio like this will leave you unprotected if there is a market dip.
To redress these high risk portfolios we’ve been automatically rebalancing some client portfolios by selling some Australian shares, and using that money to invest into gold and bonds. This is a buy low/sell high strategy. In essence, we’ve sold Australian shares at higher prices (up 42% since March) and purchased defensive assets at lower prices, which results in a portfolio that can better weather market falls.
Australian shares are up – why would you sell them now?
There’s been a lot of excitement around shares in 2020, and that’s why selling a portion of Australian shares may seem wrong. Keep in mind that smart investing principles suggest it’s important over the long run to rebalance out of assets that have performed well. Additionally, Stockspots smart algorithms waited for Australian shares to rise by over 40% in 2020 and gold to fall by 8% before rebalancing. This means that the growth part of Stockspot portfolios have already done well as share markets have risen.
It’s also important to note that when we rebalance, we don’t sell all of your Australian shares – only a small portion. Each Stockspot portfolio still contains the right number of shares for the investment horizon and risk capacity for that particular portfolio.
Depending on the timing of when you first invested and made subsequent top-ups it’s also possible that we haven’t needed to rebalance for you. We are always using topups and dividends to automatically rebalance along the way and this can reduce the need to make larger adjustments.
By rebalancing in March and in November, we have added around 1% to 1.9% to client returns.
Does selling Australian shares mean you think share markets will fall now?
Not at all.
It’s absolutely possible share markets could rise further in 2021.
However, rebalancing isn’t about trying to time your entry into the market or picking the perfect selling point. It’s about ensuring your portfolio is calibrated for your investment horizon and risk capacity.
You don’t want to rebalance too often, otherwise you’re incurring too many costs (and potentially tax). On the other hand, if you wait too long, you could miss your opportunity to profit from assets that have done well.
Rebalancing can also help smooth out your returns over longer periods of time and can minimise volatility and optimise returns.
The goal is to rebalance often enough – but not too often.
Find out more about what rebalancing is and why it’s so important for long-term investing.