Equity Trader at JMMB Group, Clive Charlton, says periodically rebalancing investment portfolios is essential to ensure investors are squeezing the maximum return out of the economy. 

Speaking on Taking Stock, Charlton said the recent global crises have created extreme volatility in investment portfolios as Governments implement changes to help deal with multiple global shocks. 

He noted that the COVID-19 pandemic created global supply chain and logistics issues which had ripple effects on everyday costs. Similarly, the Russia/Ukraine war caused a spike in multiple commodities prices. 

“And a commodity shortage led to higher inflation globally… and inflation is our biggest threat now,” Charlton said, adding that the war in Eastern Europe only compounded issues which began with the COVID-19 pandemic.

He explained that rising inflationary pressures result in a destructive cycle that can have long-term consequences on economic growth if left unchecked.

“This cycle is what we are trying to prevent; the inflationary pressures cause prices to rise and demand to fall. This then causes firms to reduce costs like labour, and purchases and have lower wages then demand will fall again. And that will spur a new cycle,” he explained.

He said to prevent this vicious cycle from happening Central Banks will increase interest rates. However, Charlton said that the increase has a lag effect on the economy.

“When interest rates go up it makes the cost of equity/debt more expensive,” he said.

The Equity Trader said that for investors to maintain their wealth, they must rebalance their portfolios to reflect the realities of the economy.

“If the general market is falling, the first thing you have to think is how to rebalance and protect your portfolio. So you’re going to find safe securities and you’re to try and secure as much cash as possible. This is because you’re assuming that the cash crunch is coming,” he explained.  

In regards to rebalancing, Charlton said being informed on what crises are affecting your local economy is important. He explained that it will help in deciding what asset classes should be increased or decreased or what securities should make up a greater part of your portfolio.

“In terms of the management of your portfolio, there are certain precautions, some rules that are consistent whether there’s a stable, declining or growing economic situation,” Charlton said.

In addition to having a diversified portfolio, he said having cash on hand is essential to take advantage of opportunities that might present themselves. He also suggested investing in dividend-paying stocks with a high dividend yield. 

He also urged investors not to become overly emotional when assessing portfolios. Instead, he said that research and understanding fundamentals are more beneficial in the long run.