Table of Contents

Rebalancing an investment portfolio is a crucial practice for staying on track with long-term financial goals, particularly after a market downturn. When markets decline, asset values shift, affecting the weight of each investment in your portfolio and potentially increasing your risk exposure. For those looking to protect and optimise their wealth, rebalancing helps restore the portfolio’s alignment with your risk tolerance, financial goals, and time horizon.

In this blog post, we’ll cover a step-by-step approach to rebalancing, and offer valuable insights on how to navigate portfolio adjustments in challenging market conditions.

Why Rebalancing Matters After a Downturn

During a market downturn, investments typically lose value. This can cause the allocation of assets (e.g., shares, bonds, cash) in your portfolio to drift from your original targets, potentially increasing your exposure to risk. Rebalancing helps to restore your original allocation strategy, keeping risk levels and growth potential in line with your long-term goals.

Reviewing Your Investment Goals and Time Horizon

Before making any adjustments, revisit your financial goals and the time horizon for each. If your goals or time horizon have shifted, these changes should inform your rebalancing approach. Short-term goals may call for more conservative assets, while long-term goals can accommodate some volatility in favour of growth.

Evaluating Your Risk Tolerance

Risk tolerance is the degree of variability in investment returns that you’re comfortable with. During market downturns, investors may feel more risk-averse, but it’s essential to stick to a risk tolerance that aligns with long-term goals rather than short-term emotions. Reassess whether your current risk tolerance still fits your financial situation before rebalancing.

Assessing Current Asset Allocation

Identify how each asset class within your portfolio has shifted from its original target allocation. For example, if equities have dropped in value, they may now represent a smaller portion of your portfolio, while cash or bonds might take up a larger share. Compare each asset class’s current percentage with your target allocation to understand where adjustments are needed.

Deciding Between Automatic vs. Manual Rebalancing

Some investors use automatic rebalancing, where their financial platform or adviser periodically rebalances the portfolio to match the target allocation. Others prefer manual rebalancing, adjusting the portfolio when needed. Manual rebalancing allows you to make adjustments based on specific conditions, which can be advantageous in the wake of a market downturn.

Determining Which Assets to Sell and Buy

Rebalancing often involves selling assets that have exceeded their target allocation and buying those that have dropped below. This approach helps to “buy low and sell high.” For instance, if equities are down and bonds are up, rebalancing may involve selling some bonds to buy more equities, capitalising on lower equity prices to build long-term value.

Evaluating Tax Implications

Selling assets can trigger capital gains tax, especially for assets held outside of superannuation. Consider the tax consequences of your rebalancing strategy and seek advice from a financial adviser if necessary. Sometimes, gradual rebalancing (spreading sales and purchases over time) may help minimise tax impacts.

Incorporating New Investments Strategically

If you’re adding new funds to your portfolio, use this opportunity to realign your asset allocation. By directing new investments towards asset classes that have become underweighted, you can rebalance without the need to sell existing assets, which could help avoid incurring capital gains tax.

Using Dollar-Cost Averaging to Rebalance Gradually

Dollar-cost averaging involves regularly investing a fixed amount into your chosen assets over time, regardless of market fluctuations. This technique can mitigate the risk of investing a lump sum during volatile times, helping you gradually rebalance without the pressure of timing the market.

Considering Market Conditions and Economic Trends

Market downturns can vary in their causes and impacts. For example, a downturn driven by economic recession may affect assets differently than one caused by rising interest rates. Understanding the broader market and economic environment can inform your rebalancing decisions, especially if some sectors are likely to recover faster than others.

Reviewing Sector and Geographic Exposures

A downturn may impact sectors or regions differently. Examine your portfolio’s exposure to various sectors (e.g., technology, energy, healthcare) and geographic regions. If some sectors or regions are overrepresented, consider diversifying to reduce the concentration risk and enhance the potential for recovery gains across different markets.

Seeking Professional Financial Advice

Rebalancing after a market downturn can be complex, especially when considering tax implications, economic factors, and individual goals. Consulting a financial adviser, particularly one who understands the local Australian market, can provide tailored advice and strategies for optimising your portfolio for recovery and growth.

Monitoring the Portfolio After Rebalancing

After rebalancing, continue monitoring your portfolio’s performance to ensure it remains on track with your objectives. Regular portfolio reviews (annually or semi-annually) can help you stay proactive, making minor adjustments as needed and avoiding significant portfolio drifts in the future.

Staying the Course in Volatile Times

Rebalancing is a disciplined approach to portfolio management that can protect your financial goals in volatile markets. However, it’s also essential to stay committed to your long-term strategy, even when market fluctuations cause short-term uncertainty. A balanced approach can give you confidence in your investments’ ability to recover and grow over time.

Conclusion

Rebalancing your portfolio after a market downturn is a vital step to maintaining financial health and protecting your investment goals. By methodically assessing asset allocation, aligning with risk tolerance, and considering tax implications, you can restore balance while positioning your portfolio for recovery. For those navigating these complex decisions, consulting a Toowoomba Financial Adviser or an Online Financial Adviser can provide invaluable guidance tailored to your specific situation. With disciplined rebalancing, you can better navigate downturns and achieve your financial objectives with confidence.