After the unprecedented events of 2020, it is quite likely that your perfectly diversified portfolio of a year ago may now need rebalancing.
2020 was certainly an exceptional year in many ways. As investors, we saw our investments and retirement savings plummet in March and April as the significance of the global pandemic hit home, only to see most stock markets recover.
Some companies that benefited from the world staying at home have done extraordinarily well – Amazon, Zoom and Ocado etc – whilst others have been fighting for their survival or forced into administration.
This has all had an impact on our investments. For example, America’s technology-heavy benchmark NASDAQ index rose a stunning 44%, whilst the average China equity fund rose by 30%. Meanwhile, the average US equity fund rose by 17%.
If these are options you hold in your portfolio, they have more than done their job, but do you have too much of them now? Is it time to reduce your holdings in them and take some profits?
Then there is the UK. UK Equity Income funds have been the mainstay of many a UK portfolio for years now, but they did quite badly in 2020 – dividends were cut and the average fund value decreased by around 9%. So, is it time to look elsewhere or, now that we have a Brexit deal, is it time to top up your holding, while UK equities are cheaper than their developed market peers?
Investors should look to hold a diversified portfolio made up of different asset classes, such as stocks, bonds, property, commodities and cash. To quote the old saying, don’t put all your eggs in one basket.
Rebalancing means selling your investments that have performed well to buy other investments that have done less well. The idea is to keep the overall shape and asset allocation of your portfolio constant, even if the size changes.
Of course, any changes you decide to make should be in line both with your investment goals and with how much risk you are prepared to take.
However, the rebalancing process is always a trade-off between risk and return. A typical portfolio includes a mixture of stocks and bonds, amongst other things. Historically, stocks have delivered high returns but do come with a significant degree of risk. Bonds, on the other hand, have offered lower returns but are usually less volatile. By combining asset classes, investors can tailor the balance of risk and return in their portfolios to suit their preferences.
Seismic events such as those experienced last year could mean that your investment portfolio is now out of kilter and is in need of rebalancing, to get back to its optimum asset allocation and shape. If you feel that this may be the case, and would like some financial advice and help, please do not hesitate to contact us.
Please be aware that the value of investments linked to the stock market and the income from them, may rise or fall depending on market conditions and that you may not always recoup your initial investment. In addition, past performance should not be seen as an indication of future returns.