Navigating Turbulence: The Case for Rebalancing

Turbulence is inevitable in the world of investing, whether due to a recession, geopolitical uncertainty, or even a simple market correction.

While these periods of volatility can be unsettling, they also present a valuable opportunity for investors to review their portfolios and consider rebalancing.

But how can you navigate the storm and make the most of these challenging times?

Why Rebalancing Matters

The goal of rebalancing your investments is to ensure that your risk exposure remains consistent with your long-term financial objectives.

Over time, different asset classes in your portfolio—like stocks and real estate—grow at different rates, either exceeding or falling short of expectations.

If you originally set your portfolio allocation to 70% in stocks and 30% in bonds, that balance can shift as the stock market rises or falls.

If left unchecked, your portfolio could end up riskier than you had initially planned.

During bull markets, for example, the value of your stocks may surge, pushing your allocation far above the intended target.

On the other hand, during stressful times like the COVID-19 pandemic, stocks may drop and suffer significant losses. Without rebalancing, your portfolio can become more volatile than you’re comfortable with.

Rebalancing is designed to bring your portfolio back to its target allocation, ensuring that you’re not overly exposed to any one asset class—especially during turbulent periods.

The Case for Rebalancing in a Volatile Market

Turbulent market conditions—such as those the U.S. economy experienced during the pandemic or more recently with market corrections—are times when rebalancing becomes especially important.

During high-volatility periods, emotions can run high, making it easy to panic and make impulsive decisions, which can be very harmful.

When the market is shaky, it can be tempting to make drastic changes to your portfolio.

However, decisions based on fear or greed often lead to poor choices. Rebalancing should never be an emotional reaction to market movement, but rather a disciplined strategy to keep your investments aligned with your long-term plan.

Taking Advantage of Market Opportunities

Rebalancing also presents opportunities to buy quality assets at lower prices. When markets decline, some assets may be trading below their true value.

Rebalancing helps you capitalize on these opportunities by selling parts of assets that have become overvalued and buying those that are undervalued.

Doing this systematically can help smooth out market volatility and increase your chances of achieving solid long-term returns.

How to Rebalance Your Portfolio

Here are a few strategies to help you rebalance your portfolio effectively:

1. Set an Initial Allocation Strategy
   Prior to rebalancing, establish your desired portfolio allocation according to your financial objectives and comfort with risk.Those with a more conservative approach might choose to hold a larger share of bonds and a smaller allocation in stocks.
   For more aggressive investors, greater exposure to stocks may be appropriate.
2. Determine Rebalancing Frequency
   You don’t need to rebalance every month. A good rule of thumb is to rebalance at least once a year or whenever your portfolio deviates significantly from your original allocation.
   Some automated investment platforms—known as robo-advisors—can handle this process for you systematically, based on market movements.
3. Reevaluate Your Goals
   Rebalancing is also a good opportunity to reassess your financial goals. Life changes, and you may need to adjust your priorities or your risk profile along the way.
4. Avoid Market Timing
   One of the biggest traps during turbulent times is the urge to try to “time the market.”
   Instead of attempting to predict the future, focus on rebalancing regularly based on a long-term strategy.
   This helps minimize the impact of daily market swings and keeps your attention on long-term growth.

Is Rebalancing Worth It?

Absolutely—rebalancing is a smart move during times of market turbulence. It’s not just a way to fix a portfolio that’s become unbalanced.

It’s a proactive strategy that helps ensure your investments stay aligned with your life goals, while reducing the chances of making impulsive decisions.

However, it’s important to remember that rebalancing doesn’t eliminate market risks altogether. What it does is help you manage your exposure and maintain discipline during times of high uncertainty.

The key is to have a clear plan, be patient, and stay committed to that plan regardless of what the market throws your way.

Written by

Gabriel Gonçalves