Well, its been a wild ride for equity markets over the last quarter of the year. In fact, a bumpy downhill slide might be a better way of characterising what has happened. All major markets are significantly down over the quarter. As I write, the major market indices have fallen 7% for New Zealand, 12% for Australia, 11% for the UK, 14% for Japan and 13% for the US from their high points in September.
I’ve yet to come across an investor who enjoys seeing the value of their investment portfolio fall. But in fact, significant market corrections, the likes of which we are going through now, do represent good buying opportunities. A good way to look at it is that equity markets are currently “on sale”, and it’s a good time to get a bargain.
This is where portfoilio rebalancing comes into its own. All investors should have defined an appropriate asset allocation based on their personal situation, financial objectives and risk profile. As an example, a “balanced” investor, might have a benchmark portfolio of 50% growth assets (shares, property) and 50% defensive assets (fixed interest, cash).
But now, with the market turmoil, that balanced investor may find that equities only account for 40% of their total portfolio. This is a strong signal to convert some fixed interest funds into equities, to return the weightings to 50/50.
This can be hard to execute. If markets have fallen, it can feel very wrong to be buying. But it is the right strategy to maintain an appropriate risk profile (avoiding your portfolio becoming too risky or too conservative). And if done well it’s a structured way of buying low and selling high, and can make a meaningful difference to your long term portfolio returns. A note here that you should also rebalance when the opposite happens i.e. when equity markets surge ahead. This is a sell signal, to again return your portfolio to its benchmark asset allocation.
Going forwards, there are a few global issues that might make markets jumpy in the short term: US/China trade tensions, Brexit, rising US interest rates, etc. I encourage investors to keep a long term perspective, stay invested, don’t get spooked by short term market volatility, but do look for opportunities to rebalance when the markets are having a sale.