Remember to Give the Gift of Rebalancing

Brian Price, head of investment management for Commonwealth Financial Network, is among the various market commentators who have sent some year-end considerations to PLANADVISER.

Price says the pandemic will likely cause the holiday season and the new year to look different, but that hasn’t changed the fact that this time of year presents a good opportunity for investors to take one final look at their investment portfolios before the calendar flips to January.

“It may not be as exciting as anticipating a visit from Santa, but repositioning certain portfolios after a recent run-up in risk asset prices may help mitigate future volatility,” Price suggests, encouraging advisers to help deliver the “gift of rebalancing” to their clients.

“I’ve long been a proponent of the view that portfolio rebalancing is one of the best forms of market timing,” Price adds. “The reason? It forces us to buy assets that have depreciated/underperformed and sell those that have appreciated/outperformed. Sure, we sometimes find ourselves in a long-term trending market where we sacrifice some upside. But, as the data shows, a simple strategy of rebalancing once per year can help preserve capital during market pullbacks.”

While rebalancing is important, Price says, it should not be done in a vacuum.

“Careful consideration needs to be given to when you execute the trades and in what types of accounts,” he says. “In retirement or qualified accounts, where investment gains accrue tax free, the decision is relatively straightforward and rebalancing can occur at any time. In taxable or non-qualified accounts, however, investors need to be very thoughtful about the timing of rebalancing decisions.”

Unless the market tumbles in the next week—which is certainly possible given the global spike in COVID-19 cases and widespread political tensions—equity market investors will end 2020 with solid gains.

“As a result, many investors may be a little more overweight stocks relative to bonds across their balanced portfolios,” Price says. “Delaying the decision to rebalance until early next year may be a worthwhile consideration, as the tax bill for selling equities at that time won’t come due until April 2022. Also, you may have the benefit of harvesting losses for the remainder of 2021 to offset the gains incurred during your January rebalance.”

Other Thoughts on 2020

Greg Hahn, president and chief investment officer (CIO) at Winthrop Capital Management, also sent some year-end thoughts to PLANADVISER, focused on some of the remarkable fiscal and monetary events that have unfolded this year.

As Hahn recalls, in response to the pandemic and in efforts to keep the economy moving, the Federal Reserve this year ramped up its open market purchases of debt, building its bond portfolio to $7.18 trillion as of mid-November.

“In addition to purchasing Treasury securities and other U.S. obligations, the Federal Reserve expanded its purchases to include corporate securities,” Hahn observes. “The bond portfolio of the Fed now represents 0.5% of the Fed’s capital. At the same time, U.S. debt has increased to $26.9 trillion by September 2020, yet foreign central bank holdings of Treasury obligations remain at $3.4 trillion.”

As Hahn explains, this means the Federal Reserve is the marginal buyer of U.S. Treasury debt, supporting the financing of the U.S. government and helping to create the expanded money supply.

“This represents a whole new monetary regime that extends beyond targeting the Fed funds rate to control the rate of expected inflation and further employment growth,” he says.

Broadly speaking, Hahn expects recovery will accelerate in the second half of 2021.

“During the past year, despite the pandemic, the large-cap technology stocks, including Apple, Facebook and Amazon, helped drive the equity markets to new highs,” he says. “Next year, we do not expect technology to continue to drive the market. Instead, we foresee a shift away from technology toward cyclical and more down-beaten companies that were affected by COVID-19. We anticipate a recovery to take hold in the economy in the second half of 2021 and for corporate earnings to reflect that recovery. At the same time, however, market returns will likely be more muted, given that a lot of gains have already been pushed forward this year on the expectations of the success of the vaccine and reopening of the economy.”