It would be fair to say 2022 has been a turbulent year for investors. In the wake of the Covid pandemic and rising inflation, the world watched as Russia invaded Ukraine in February, something that fuelled further economic uncertainty across the globe.
The World Bank has reduced its global growth forecast for 2022 from 4.1%, as predicted in January 2022, to 2.9%. Needless to say, reports like this, together with soaring inflation worldwide and steep interest rate hikes have had an effect on the stock market.
In June the S&P 500 index saw a downturn of more than 20% from its previous highest point, officially putting it into “bear market” territory. While this will probably be short term, you might be wondering what steps you can take to ensure that your investments weather the current uncertainty.
One action you may want to consider is to rebalance your investments, which is where you realign the weightings of your investment portfolio. Read on to discover three clever reasons why this could help your investments survive the turbulent stock market.
1. It ensures your investments are exposed to the right level of risk
Investments typically comprise stocks and shares, and fixed income assets such as bonds, cash and even property. Over time, these increase or decrease in value. During robust economic periods, stocks tend to outperform fixed income assets, meaning your investments’ exposure to equities could increase over the long term.
This could increase the level of risk your money is exposed to. To demonstrate this, you might want to consider the following example that was featured in a Motley Fool article.
It uses the scenario of someone investing £100,000 into a portfolio that consists of 70% equities and 30% bonds. This means that at your risk tolerance, you’re happy to expose £70,000 to higher-risk equities and £30,000 to lower-risk fixed income assets.
If the value of your stocks and shares increases over time from £70,000 to £105,000, and the bonds rise from £30,000 to £35,000, you would then have an investment split of 75% equities and 25% fixed income. As a result, the level of risk within your portfolio has increased.
This means that if the market takes a downturn, your investments may be at more risk of suffering a significant drop in value. By rebalancing your investment back to its original 70/30 weighting, the level of risk returns to where you originally wanted it to be.
2. It could expose your investments to greater growth potential
While rebalancing your investment ensures that its weightings are in line with your original attitude to risk, it’s also an opportunity to assess whether the level of risk it’s exposed to is still right for you.
For example, if you recently received a large inheritance, you might be better placed to withstand a potential loss, and so may want to consider exposing your investment to higher levels of risk. As growth typically comes from the higher-risk assets, such as stocks and shares, this could mean your money enjoys greater growth over the long term.
If, on the other hand, you’re approaching retirement and less able to withstand a loss, you might want to consider reducing the level of risk your money is exposed to. Always speak to a financial planner before adjusting the risk level, as they will ensure whether it’s the right strategy for you.
3. It takes advantage of the ebb and flow of the market
Investment is cyclical in nature and asset types, such as shares or government bonds, typically fall in and out of favour. The same can also be said for investment styles. For example, high yield shares are usually more popular in a volatile market as they have historically tended to perform better.
When the market bounces back, you might want to consider moving from high yield shares to others that offer higher growth potential. Rebalancing provides an opportunity to assess your assets and investment style, and whether a change in the stock market means you should now be considering a different strategy.
Get in touch
Remember that rebalancing can carry costs, so doing it too often could increase the charges on your investment, that’s why speaking to a financial planner is important. Additionally, they will confirm your current risk profile to make sure you rebalance in line with it.
If you would like to discuss the rebalancing of your investments, please contact us on hello@ardentuk.com or call 01904 655 330.
As we are an award-winning financial advice company that was a 2022 VouchedFor Top Rated firm, you can have peace of mind that you will receive excellent advice and the highest quality service.
Please note
This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.
