Rebalancing your portfolio can be challenging, especially when markets are on the rise. But neglecting this essential step can lead to concentration risk and a poorly aligned investment strategy.
Market strategists agree that selling or trimming better-performing stocks is crucial to avoid over-concentration in specific sectors or assets. However, investors often struggle with rebalancing due to biases such as fear of missing out, recency bias, loss aversion, and overconfidence.
To overcome these biases, advisors can explain their rebalancing strategy to clients by highlighting the importance of risk-sizing. This approach allows clients to maintain exposure while taking profits along the way.
Lesley Marks, chief investment officer at Mackenzie Investments, emphasizes the need for tax implications when rebalancing a client’s portfolio. Advisors should discuss this with clients during regular checkpoints to ensure a smooth transition.
Sadiq Adatia, chief investment officer at BMO Global Asset Management Inc., recommends quarterly reviews rather than monthly ones. If a stock is up significantly and the outlook remains good, he suggests trimming it by half instead of selling entirely.
Ultimately, rebalancing is about discipline rather than prediction. By prioritizing portfolio construction, risk tolerance, and investment time horizon, investors can restore symmetry to their portfolios and avoid costly mistakes.
Key Takeaways:
* Rebalancing your portfolio amid rising markets is essential for avoiding concentration risk.
* Investors often struggle with biases such as fear of missing out, recency bias, loss aversion, and overconfidence.
* Advisors should explain their rebalancing strategy to clients by highlighting the importance of risk-sizing.
* Tax implications should be considered when rebalancing a client’s portfolio.
Source: https://www.theglobeandmail.com/investing/globe-advisor/article-rebalancing-in-a-bull-market-requires-the-discipline-to-cut-winners