Rebalancing your portfolio – keeping control when markets run hot
In this week’s video insight, I tackle the question I’m most often asked – is the market going to crash? The truth is, no one knows. While valuations across measures like price-to-earnings and market-cap-to-GVA suggest markets are expensive, they can stay that way for a long time. Rather than selling out, investors should consider rebalancing – trimming profits from equities that have grown beyond their target allocation and reallocating to alternatives such as private credit or arbitrage strategies. This approach helps manage risk and reduce anxiety without trying to time the market’s next move.
For more information, give David Buckland or Rhodri Taylor a call on (02) 8046 5000.
Transcript:
Hi, I’m Roger Montgomery, and welcome to this week’s video insight.
The question I’m asked most often is: Is the market going to crash?
The answer, of course, is — I don’t know.
Nobody does. Sure, there’s evidence that the market is expensive. In fact, some experts describe current pricing as “worrisome.” Indeed, if you look at historical price-to-earnings ratios, one-year forward price-to-earnings, the CAPE Shiller ratio — which is a cyclically adjusted price-to-earnings ratio — or even more esoteric measures, such as market capitalisation to gross value added, you’ll find that the market is at an extreme level at the moment.
What’s important to understand is that the market can remain at these extremes for a long time. In fact, one famous aphorism goes: “The market can remain irrational for a lot longer than you can remain liquid.” That’s worth keeping in mind.
A silly thing to do when the market is expensive is to run for the hills — to sell out. That doesn’t make sense.
It is true, though, that if you were to buy into the market today — particularly the S&P 500 or the NASDAQ — you’re likely to be locking in a lower return. Remember another powerful and worth-remembering aphorism: The higher the price you pay, the lower your return. On some estimates, buying the S&P 500 today is locking in an average return of something less than zero over the next twelve years.
Again, I don’t know if that’s true, but what I do know is that there are some alternatives that can give you comfort if you’re nervous about the market being expensive. Rather than selling out, what you should consider implementing in your portfolio is rebalancing — and this should be part of your annual review.
For example, if you’ve decided that your risk profile, tolerance, or appetite means you only want 40 per cent in equities, but you now have 50 or 60 per cent in equities because they’ve done so well over the past few years, it might be time to rebalance back to your original weightings.
If you’re trimming profits from the most expensive stocks in your portfolio, where should you put that money? Some alternatives include private credit and arbitrage funds, where profits are made irrespective of the direction of markets. It certainly makes sense to think about generating attractive returns from asset classes that don’t have direct exposure to equity markets if you’re trying to reduce your risk.
One thing’s also worth remembering: when markets are going up, everything seems good.
Picking tops and bottoms is a fool’s game — but rebalancing makes a lot of sense. And that’s my answer to the question of whether or not the market’s going to crash. I don’t know. But rebalancing reduces some of the anxiety.
That’s all we’ve got time for this week. I look forward to talking to you again next week. In the meantime, continue to follow us on Facebook and Twitter.
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Past performance is not a reliable indicator of future performance. Returns are not guaranteed and so the value of an investment may rise or fall.
This information is provided by Montgomery Investment Management Pty Ltd (ACN 139 161 701 | AFSL 354564) (Montgomery) as authorised distributor of the Aura Core Income Fund (ARSN 658 462 652) (Fund). As authorised distributor, Montgomery is entitled to earn distribution fees paid by the investment manager and may be issued equity in the investment manager or entities associated with the investment manager.
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Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.
He is also author of best-selling investment guide-book for the stock market, Value.able – how to value the best stocks and buy them for less than they are worth.
Roger appears regularly on television and radio, and in the press, including ABC radio and TV, The Australian and Ausbiz. View upcoming media appearances.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
