Today’s investors have the benefit of advanced science, coupled with leading-edge investment management practices, to create portfolios that automatically take advantage of the ups and downs of the market. That’s why investors who work with a professional advisor and invest according to a detailed plan don’t have to worry about trying to buy low and sell high.
Portfolio rebalancing helps avoid emotional investing
Common investor reactions to a falling market are to become upset, nervous and maybe even angry. It’s really important to be wary of these emotional responses to market volatility. Emotions can cause people to sell low and buy high. It’s the job of advisors to help their clients see the advantages of volatility at every life stage, instead of simply reacting to the constant ups and downs.
How to rebalance a portfolio to make volatility work for you
Markets are unpredictable. They go up and down all the time because the values of individual companies, sectors and regions are constantly changing. Knowing that there will be volatility is the only thing we can predict with certainty: this creates a huge opportunity to put it to work for you.
One way of making volatility work in your favour is to use automatic portfolio rebalancing. Investors who work with a good financial advisor don’t need to know how to rebalance a portfolio: their advisor will do this for them.
How portfolio rebalancing works
A typical investment portfolio is made up of three parts, or asset classes:
- Equities (individual company stocks or equity mutual funds and ETFs): these investments usually fluctuate the most.
- Fixed income investments (for example, GICs and bonds): these investments typically fluctuate less than equities.
- Cash and cash equivalents (for example, money market funds): these have virtually no fluctuation, except between different currencies.
The balance of each asset class is based on the investor profile that you created with your IG Consultant (based on your investment goals and risk tolerance). The portfolio below is a typical balanced portfolio: