Invest Financial Planning

Portfolio Rebalancing In The Age of Coronavirus: Everything You Need To Know To Do It Right

Donna Fuscaldo  |  April 30, 2020

Is your investment portfolio in need of some Coronavirus-induced rebalancing? Maybe. Here’s what you need to know.

With stocks enduring violent swings up and down over the last few weeks, it’s understandable that investors may want to ensure their money is in the “right” place.  Nobody knows how long the COVID-19 pandemic will last, or what long-term impacts it will have on the economy. 

For many of us, the natural instinct in uncertain times is to sell off stocks and stash cash under the mattress. But history has proven that not only does this move not pay off over the long haul, it costs you big time. The best strategy is to stay the course — but what if your portfolio is looking a little unbalanced as of late? 

“It’s really important to rebalance, making sure your accounts are aligned to your financial goals,” says Leanna Devinney, an assistant branch manager at Fidelity’s Framingham Investor Center. “With stocks going up and down, asset mixes have likely veered off course.” 

KNOW YOUR NEW RISK TOLERANCE 

Before you can begin to consider rebalancing a portfolio right now,  take the time to reassess your risk tolerance. The economy is halted, unemployment is at unprecedented levels, and it’s not clear when businesses will return to normal. All of that may have altered the amount of risk you can handle. It doesn’t help that prior to the pandemic stocks were enjoying a more than ten-year bull run. That may have resulted in heavy exposure to stocks, something you aren’t as comfortable with today. 

There are many ways to approach rebalancing, but for the average investor, a good starting point is with your mix of stocks, cash, and debt.  This mix should still be aligned with your long-term investment strategy prior to the pandemic. Let’s say your ideal investment mix is 75% stocks, and 25% cash and bonds. If it moved away from that over the last few years, it’s time to rebalance. Understandably buying more stocks to increase your exposure may conjure up soem fears — who knows if equities will be up or down at any given moment and if and when the economy will recover? 

To get around those sometimes paralyzing concerns, Devinney at Fidelity says instead of moving holdings in the portfolio, direct any new contributions toward stocks until the percentage is back at pre-pandemic levels. Low-cost exchange-traded funds, mutual funds, and index funds are great ways to get stock exposure without having to pay too much in fees.

But rebalancing doesn’t have to end there. It can also be applied to the sectors within your portfolio. Let’s say you were among the lucky investors to have a position in Zoom Video Conferencing, the popular video conferencing app that has surged more than 140% since the pandemic. That may have pushed your tech exposure higher than your comfort level, requiring you to reduce your position in that sector. Also, for savvy investors who have the time and know-how, rebalancing can also occur at the stock level. Just know that it won’t be easy during the pandemic. Volatility isn’t expected to go away any time soon, which could result in investment mistakes.  

TAKE BABY STEPS WHEN REBALANCING 

The last thing rebalancing investors should do is alter their portfolio in one fell swoop. Baby steps are almost always better in times of stock market uncertainty.  “If you need to adjust something, sell a certain sector, or buy another sector — do about 25% of it,” says JJ Kinahan, chief market strategist at TD Ameritrade. With all the stock market volatility, that may be all that’s needed to get your portfolio back in balance. If in a couple of weeks it’s still not aligned, you can then do another 25%. “Investors’ biggest mistake is they think it’s an all or nothing world,” says Kinahan. “Professionals always think in terms of things being iterative.” Slow and steady is important now more than ever, given there’s little in history to draw from. Sure there was the Spanish Flu of 1918, but how many investors do you know from back then? 

STAY THE COURSE 

When it comes to rebalancing in tumultuous times, it’s understandable you want to check your portfolio every day or week, but rebalancing should be like investing: set it and forget it. That doesn’t mean you should bury your head in the sand, but once you rebalance, hold off on making more moves for at least a few months. If you use a digital platform to invest, you’re in luck. Most will alert you once your portfolio is out of alignment. 

The most important thing for investors to do in this environment is to ignore the noise and stay the course. Overreacting will cost you money and stress you out — two things you absolutely want to avoid. “These kinds of things (the pandemic) underscore the value in taking a long-term approach to investing,” says Gerry Frigon, president, and chief investment officer at Taylor Frigon Capital Management. “Don’t let yourself get caught up in the emotion of the moment.”

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