Panic selling during the coronavirus pandemic has become a common
phenomenon. The lockdown announced post the virus outbreak wreaked havoc on
almost every asset class. The damage to the economic activity has prompted
central banks and governments to announce measures to support the businesses,
which has restored some confidence in the capital markets.
While rebalancing your portfolio should be a regular exercise, the pandemic is all the
more reason to do so. Several sectors have suffered more than others, which
calls for a rebalancing of your portfolio.
Rebalancing your portfolio involves selling the asset classes that are
over-allocated owing to the changing trends in the market and buying those that
are under-allocated.
The idea behind reassessing a portfolio at regular intervals is
to maintain a proper risk level, however, there are several factors involved
such as trading costs to sell and buy securities, taxes and time.
Why rejig your portfolio?
Research suggests that markets reward long term investments more
often than not, therefore exiting the markets when the value of your portfolio
falls may not be the right move. In such an uncertain market environment
portfolio rebalancing may result in cutting losses significantly.
Like several other instruments and ways that are often used to
cut risk in volatile markets, rebalancing of portfolios is also aimed at
minimizing risk and not particularly to make a windfall.
Some resilient areas
Reassessment of the sectors is a prerequisite. Sectors like
travel and tourism have witnessed the most damage. However, there are some sectors
which are considerably more resilient and may be included in your portfolio.
Healthcare: One sector that governments are relying on is healthcare and the biotech industry. While announcing an emergency rate cut in the policy interest rates, the chief of the Federal Reserve said that the ultimate solution to the current economic and healthcare crises will have to come from the healthcare professionals. Capital markets have also seen the pharma sector stocks performing better than its peers as the demand for medicines, masks, hand wash and disinfectants among other such products have sky-rocketed.
Telecom: The Indian telecom sector was going through a rough patch before the coronavirus outbreak brought the economic activity across the globe to a grinding halt. But the increased dependence of businesses, educational institutions and the general public during the lockdown has generated heavy demand for such services. Investors have also chosen to redirect their investment in the telecom sector, which for the Indian telecom industry may turn out to be a blessing in disguise.
Safe-haven assets: Traditional safe-haven assets like Gold have found renewed interest during the current pandemic. Investors have turned risk-averse and have turned to assets like Gold. Gold prices have surged to record levels. Analysts expect the buying interest in Gold to continue since the stocks have been left bruised and battered due to the lockdown and disruption in economic activity. Although Gold itself doesn’t produce anything, investments in the yellow metal is a testament of the uncertainty in the financial markets right now.
Insurance: The insurance sector is another area where the impact of the pandemic is expected to be relatively less than others. The counter-cyclic nature of the sector may, in fact, boost the business of companies offering general insurance. Recently, the Insurance Regulatory Development Authority of India asked the insurers to cover the COVID-19 cases in their existing policies. This particular move, analysts have said, may benefit the sector during this period.
(Source: Indian Express)
A few strategies to consider
Constant-mix strategy: This
strategy of rebalancing focuses on the allowable percentage composition of an
asset in a portfolio. Every asset class, or a security, is given a target
weight and a corresponding tolerance range. When the weight of anyone holding
moves outside of the allowable band, the entire portfolio is rebalanced to
reflect the initial target composition.
Constant proportion portfolio
insurance (CPPI): When an investor sets a lowest acceptable limit on the currency
value of their portfolio, he or she is following CPPI. The investor then makes
asset allocation accordingly.
Over-obsessive: Stock market volatility can prove a good decision
yesterday a poor one today but an investor should not give in to the temptation
of constantly rebalancing the portfolio as this might attract fees and taxes
which can hurt overall gains. Some funds even restrict the frequency of trades
to avoid such a situation.
Losing Focus: Rebalancing needs alertness. You can’t afford to
lose focus and be unaware of the recent developments. Investors must derive an
investment that fulfils both their long term and short term goals.
Conclusion:
As markets witness major changes and high volatility, money managers and experts are going for a reassessment of the investment portfolio. Your portfolio prior to the outbreak should not remain the same after the pandemic.
Tata Capital Wealth
provides you with a range of Wealth Management solutions. We offer top-notch,
well-researched investment products for each asset class. Our endeavour is to
ensure that we provide solutions best suited for your investment goals.
18 October 2024
5 mins read
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