We’re experiencing a unique time right now in many different respects, but financially, we’re in a particularly notable moment. That’s why Worth has teamed up with UBS Financial Services Inc. to host the online roundtable series Financial Front Lines in an effort to help take the complexity out of your investment portfolio and discuss emerging best practices and strategies to manage your wealth during this time.

In this week’s session, U.S. Chief Investment Officer Michael Crook and UBS Private Wealth Advisor Sharon Sager spoke about how to rebalance your portfolio, along with other investing strategies that could be valuable during times of crisis. Here are some key takeaways from that discussion.


What Is Rebalancing?

“Rebalancing is essentially moving back to that [strategic asset allocation] target once the market has shifted a portfolio enough that it’s deviated,” Crook said. Rebalancing largely centers around the buy-low, sell-high strategy and adds value to your portfolio by allowing for a “more consistent level of portfolio risk,” according to a recent UBS blog post

What’s the Difference Between Portfolio Drift and Deliberate Rebalancing?

“There’s two basic ways to think about rebalancing,” Crook said. “The first would be that you rebalance on a calendar basis, once a month, once a year, I’m going to rebalance my portfolio and go back to my strategic target. That works OK, but what actually does a better job is paying attention to the drift of the portfolio. When you go through a significant event in the market—whether its 2019, when the equity market was up 30 percent, or this year, when it took only a couple weeks for the market to fall 35 percent—you want to rebalance during those periods and take advantage of those big moves.”  

Crook asserts that over the last couple months there have been two rebalancing opportunities, from a portfolio drift vantage point, where investors following this strategy would have sold fixed income and bought more equities. 

As with any strategy, though, rebalancing comes with its benefits and risks.

“The benefit of this is it’s a very natural way to add back to equity exposure,” Crook said. “The risk is that it doesn’t work temporarily if the market continues to fall.”

“I would add that, for our clients, it takes the emotion out of it a lot of the time and creates a discipline,” Sager said. “Rebalancing forces you to sell high and buy low, which is what it’s all about, to oversimplify things.” 


How Can Rebalancing Help Keep You in the Market Long-Term?

Rebalancing as a strategy goes against what many investors would naturally think to do.

“It’s completely counterintuitive selling your winners and adding to your underperformers, but just going back to the golden rule of investing, which is buy low and sell high, this forces you to do that,” Sager said.

“Although the long-term returns might not be that different, rebalancing can reduce the volatility by mitigating drawdowns, and that’s what keeps people in the market for the long-term,” Sager added.

Based on rebalancing dates, Crook estimates that this year, so far, an investor could have added around 30 basis points to 1.3 percent, depending on when they rebalanced.

“20, 30 basis points doesn’t sound like much, but it’s better than nothing, and that does add up over time,” he said. “Cumulatively, we think a reasonable target is 20 to 40 basis points, so 0.2 to 0.4 percent per year benefit from rebalancing.” 

How Does UBS’ 3L Strategy Account for Risky Assets?

UBS has an investing strategy known as the 3L approach, which consists of three “buckets” essentially:

1. Liquidity—to help maintain your lifestyle.
2. Longevity—to help improve your lifestyle.
3. Legacy—to help improve the lives of others.

Now, when it comes to risky assets, the question becomes where to place them. Following this strategy, Sager recommends putting riskier assets in the legacy bucket because it can be multi-decade.

“When clients have several years of liquidity, or cash on hand, they make better decisions with their risky assets because they’re mostly confident that they’re not going to have to sell their risky assets when they’re down,” Sager said.

Is the Market Starting to Recover?

The good news is that, while we still have a long way to go, the market is beginning to recover.

“We’ve seen some pretty substantial up days over this week, starting early last week,” Crook said. “The big question here is the economic impact. The market is trading based on positive news from a case standpoint. There could certainly be a situation where we get cases almost down to zero and yet we’re still not able to leave our homes.” 

Whatever the coming weeks have in store, it’s important to have a portfolio that can weather the uncertainty.

“We’re investing in an environment of high uncertainty, and that’s probably always true to some extent, but right now, in particular, there’s no historical model that’s valuable at all for understanding how this will progress,” Crook said. “What I tend to think about in [this] type of environment is that we want portfolios that will work well no matter what happens. I don’t mean just agnostic to what happens, but we need portfolios that give us a lot of that upside. At the same time, it’s important that investors know what their downside is in their portfolio and that they don’t have portfolios that they could lose 50 percent if they can’t sustain a 50 percent loss.”