11/23/2022
As Warren Buffett once said, "the stock market is a device for transferring money from the impatient to the patient." This is particularly relevant during times of market downturn, when the temptation to sell off investments in a panic can be strong. That's where rebalancing comes in. By periodically adjusting the allocation of assets within your portfolio, you can take a disciplined and long-term approach to investing, rather than reacting impulsively to short-term market fluctuations.
One of the main benefits of rebalancing during a market downturn is that it allows you to buy low. When certain assets within your portfolio decline in value, rebalancing involves adding to those positions at a lower price than previous purchases, and crucially more shares than previous purchases. This can help you take advantage of temporary price discrepancies and potentially generate higher returns over the long term. As Buffett himself said, "be fearful when others are greedy and greedy when others are fearful." By rebalancing your portfolio during a market downturn, you can potentially benefit from the fear and uncertainty of others.
Rebalancing can also help you diversify your portfolio, which can mitigate the impact of market volatility. By periodically adjusting the allocation of assets within your portfolio, you can ensure that your portfolio is diversified and not overly concentrated in any one asset class or sector. This can reduce the overall risk of your portfolio and potentially smooth out returns over time.
Another advantage of rebalancing during a market downturn is that it can help you manage your risk tolerance. Different investors have different levels of risk tolerance, and rebalancing allows you to adjust your portfolio to align with your individual risk appetite. For example, if you are more risk-averse, you may want to increase your allocation to defensive assets such as cash and bonds during a market downturn. On the other hand, if you are more risk-tolerant, you may want to maintain or even increase your allocation to riskier assets such as stocks. Rebalancing allows you to tailor your portfolio to your specific risk tolerance and financial goals.
Of course, rebalancing during a market downturn is not without risks and challenges. One potential issue is that you may need to sell assets at a loss in order to rebalance your portfolio. This can be difficult if you are emotionally attached to your investments or concerned about realizing capital losses. However, it's important to keep in mind that rebalancing is a long-term strategy, and selling assets at a loss in the short term may be necessary in order to achieve higher returns over the long term. As Buffett has said, "our favorite holding period is forever." By adopting a long-term perspective, you can potentially weather the storms of market volatility and come out ahead in the end.
So, to sum it up, rebalancing during a market downturn is like tending to a garden. Just as a gardener must prune and fertilize their plants in the off-season to help them thrive, investors must periodically trim and nourish their portfolio to keep it healthy and growing. By planting new assets before the warmth of an economic upturn, low cost basis can achieved. Don't be afraid to roll up your sleeves and get your hands dirty – rebalancing is like a green thumb, helping your portfolio bloom even when the economic climate is less than favorable.
Justin Hudock
Starboard Wealth Management
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