Exploring Portfolio Management During Santa Claus Rally Days

Shall We Rebalance Our Portfolio?

It's Sunday, the second half of December, and the year's almost done. As usual, I'm checking my portfolio and getting ready for the next trading week. But today, I thought, "Why not take a breather and reflect?" So, here I am, writing about it. Because, what better way to avoid actual work than by pretending to be deep in thought about rebalancing? Hehe ??

As I sift through my investments, I can't help but chuckle at some of my past decisions. I remember that time I thought investing in that obscure company startup was a brilliant idea. Yeah, me neither. But hey, it's all part of the learning curve, right?

For me rebalancing isn't just about numbers, it's about learning from the past and planning for the future. It's like giving your portfolio a little TLC, making sure it's in tip-top shape for whatever the market throws at it next. So, here's to another week of trading adventures, and hopefully, fewer facepalm moments!

Whether you are starting up and building your first-ever portfolio, gearing up for a market re-entry, or simply working on building up your cash position for future opportunities, this article is perfect for you. As we approach the end of the year, it’s time to take a hard look at how your portfolio has performed and assess whether your current holdings are causing you a heart attack every time the market dips.??

Yes, It’s the holiday season, a time when we reflect, plan, and set goals so why not extend that to our investment strategy? If you’re feeling anxious or uncertain with every downturn in the market, now might be the perfect time for a portfolio checkup. Market corrections, volatility, and occasional dips are natural, but they shouldn’t leave you up at night wondering if you’re overexposed or if your asset allocation is still in line with your goals.

As we look ahead to the next year, it’s crucial to ask yourself, is your portfolio performing as you expected? Are you holding onto assets that might cause more harm than good when market conditions shift? And lastly, is it time to diversify or look at alternative asset classes like MP2 from Pag-IBIG for greater stability? (if you are in the Philippines or an OFW)

In this article, we’ll discuss why rebalancing is important, how to make adjustments to your portfolio, and whether it’s time to explore other asset classes that can provide you with more options in today’s evolving market. Whether you’re feeling the effects of market volatility or just want to prepare yourself for future opportunities, the end of the year is an excellent time for reflection, rebalancing, and adjusting your investment strategies for the road ahead.

Before we start, let's start with some disclaimer:

Disclaimer: This is just my personal reflection and not financial advice. Investing in the stock market involves risks, including the loss of principal. Past performance is not indicative of future results. Always do your own research or consult with a financial advisor before making any investment decisions. The opinions expressed here are my own and do not reflect the views of any financial institution or advisory service, manage your own risks accordingly.

How Often Do You Rebalance Your Investment Portfolio?

Let’s kick off with the million-dollar question how often should you rebalance your portfolio? Is it every time the market sneezes, fed rate cut announcements? new IPO? , or should you wait until a pandemic (of the economic kind) hits? Rebalancing depends on several factors, but here’s a breakdown of common strategies ( not exhaustive)

Periodic Rebalancing

Think of this as the “set it and forget it” method. You adjust your portfolio at regular intervals (quarterly, semi-annually, or annually) without sweating the small market fluctuations. This approach suits those who prefer less hands-on management. It’s like giving your portfolio a routine check-up, ensuring everything is in order without getting bogged down by daily market noise. This method is great for those who want to maintain a balanced portfolio without constantly monitoring their investments. Plus, it can help you stay disciplined and avoid emotional decision-making.

?Threshold-Based Rebalancing

If you’re a bit more hands-on (or a bit more nervous about how much your tech stocks are appreciating), you’ll want to use this approach. You’ll set a specific threshold—say, a 5-10% change in the value of an asset—and when that happens, you tweak your portfolio. This approach strikes a balance between action and inaction. It allows you to respond to significant market movements without overreacting to minor fluctuations. Think of it as a way to keep your portfolio aligned with your risk tolerance and investment goals, ensuring that no single asset class becomes too dominant

Event-Driven Rebalancing

Life events happen—marriages, births, pandemics When these big events take place or when the market goes on a rollercoaster ride, it’s time to rebalance. It’s like the financial equivalent of changing your tires when they’ve gone bald. This method is more flexible and responsive to significant changes in your personal life or the market. It ensures that your portfolio remains aligned with your current financial situation and goals. Whether it’s a major life milestone or a sudden market downturn, event-driven rebalancing helps you adapt and stay on track.

?Why Should You Rebalance?

?Now, let’s get to the juicy stuff. Why should you go through the trouble of rebalancing and then re allocation in the first place? I mean, if it’s working fine, right?

?Maintaining Your Goals

?Just like you don’t wear the same clothes you wore at 16 (or at least we hope you don’t), your investment portfolio needs to evolve as your life, risk tolerance, and goals do. Rebalancing ensures that your portfolio stays in line with your financial objectives, whether you’re saving for retirement, a rainy day, or that elusive yacht. It’s about making sure your investments are aligned with where you are in life and where you want to go. As your priorities change, so should your portfolio.

Risk Management

In the wild world of investing, one day, your portfolio is on top of the world, the next, it’s getting hit with an economic left hook. Rebalancing helps manage risk by ensuring your portfolio doesn’t get too lopsided in one asset class—because let’s face it, no one wants to be the guy holding only 100% crypto when the market crashes. By regularly rebalancing, you can maintain a diversified portfolio that spreads risk across different asset classes, helping to protect your investments from market volatility.

Capitalizing on Market Conditions

When things are looking good (hello, Santa Claus Rally!), it’s easy to get carried away. But don't forget, those gains need to be locked in before they disappear faster than you can say "Christmas bonus." Rebalancing allows you to take profits from overperforming assets and redistribute them to sectors that are underperforming but may offer future potential. This strategy helps you buy low and sell high, maximizing your returns over time.

Behavioral Discipline

?We’ve all been there. Your tech stocks are booming, and it’s tempting to keep riding the wave. But, sticking to your rebalancing plan ensures that emotions don’t mess with your financial future. It’s like sticking to your New Year’s resolution to eat healthy even when you’re staring at a box of Christmas cookies. By following a disciplined rebalancing strategy, you can avoid making impulsive decisions based on short-term market movements and stay focused on your long-term goals.

?When Should You Rebalance?

?Okay, now that you know the "why" behind rebalancing, let’s talk timing. Because let's be honest, timing matters. It’s not about rebalance every single day—unless you enjoy panic-selling and feeling frazzled.

Year-End Adjustments

Hello, Santa Claus Rally! This period is prime for rebalancing because of holiday optimism, year-end portfolio adjustments by institutional investors, and the economic “boost” from consumer spending. If your portfolio has had a good year, this is a great time to take those gains off the table and shift towards safer or more stable assets. It’s like giving your portfolio a holiday bonus and then making sure it’s ready for the new year. Plus, it’s a good way to lock in profits and reassess your strategy for the upcoming year.

Market Events

Whether it’s a correction (we’ve all seen one) or a sudden bull run, this is the moment to rebalance. Markets can be unpredictable, but if you see major shifts, you want to align your portfolio accordingly. This isn’t about playing psychic; it’s about being prepared. When the market takes a nosedive or skyrockets, rebalancing helps you stay on course and avoid getting swept up in the frenzy. It’s about maintaining your investment strategy despite the market’s ups and downs.

Personal Financial Milestones

Did you just get a promotion? Or maybe you’re looking to retire in five years? Big life events like these are perfect moments for rebalancing. These changes may affect your income, spending habits, and risk tolerance, which means your portfolio probably needs a facelift. Whether it’s a new job, a new baby, or planning for retirement, rebalancing ensures your investments reflect your current financial situation and future goals. It’s like updating your wardrobe to match your new lifestyle—your portfolio should grow and change with you.

?Shall We Look for Other Alternative Asset Classes to Add?

While traditional stocks and bonds are the bread and butter of most portfolios, there’s a whole world of alternative assets that could be your secret sauce to diversification and better risk-adjusted returns. Let’s explore:

?Real Estate Investment Trusts (REITs)

We’re talking about cash cows like AREIT and MREIT, which can offer juicy dividends and have a relatively low correlation with stocks, making them a solid option when the market is volatile. Philippine REITs are doing well, especially as retail activity (and mall traffic) surges during the holidays. REITs provide a way to invest in real estate without the hassle of owning physical property, and they can be a great source of passive income.

Infrastructure Investments

In case you’re not already all-in on urban development, infrastructure funds could be a nice addition. With the government’s “Build, Better, More" program and a global push for infrastructure development, these assets are like that dependable friend who always pays you back on time. Investing in infrastructure can provide stable returns and is often less volatile than other asset classes.

Commodities

Gold, silver, oil, and agricultural products aren’t just for people who like to watch financial news on repeat. Commodities tend to do well when there’s inflationary pressure, and let’s face it, who doesn’t want to hedge against rising costs? They can provide a solid buffer in your portfolio during periods of economic uncertainty. Commodities can also act as a hedge against currency fluctuations and geopolitical risks.

Private Equity and Venture Capital

If you have a higher risk appetite (and a bit more capital), private equity and venture capital can offer high returns. Think of it as the Wild West of investing—high risk, high reward. These investments can provide significant growth potential, but they also come with higher risks and longer investment horizons.

Pag-IBIG MP2 Program

In the Philippines, the Pag-IBIG MP2 savings program is an excellent alternative investment class, particularly for those looking for a safe, fixed return in a government-backed instrument. The MP2 program offers a higher interest rate than regular savings accounts, typically around 6-7% per annum, and the interest is tax-free, making it a compelling choice for conservative investors looking to preserve capital while still growing their wealth. Furthermore, this option offers easy access to your funds (after a 5-year lock-in period) and the security of government guarantees. While the returns might not be as high as equities, it can serve as a stabilizer within a diversified portfolio, providing lower volatility and safety during market downturns or riskier market periods.

Bitcoin and Cryptocurrencies

Cryptocurrencies like Bitcoin have taken the financial world by storm. While highly volatile, they offer the potential for significant returns. Bitcoin, in particular, is often seen as digital gold, providing a hedge against inflation and currency devaluation. However, a word of caution, investing in cryptocurrencies requires advanced knowledge and understanding of the market. Due to their high volatility, it’s important to only allocate a small portion of your portfolio to cryptocurrencies and to stay informed about the latest developments in the crypto space. This asset class may not be suitable for all investors, especially those who prefer a more stable investment approach.

Forex (Foreign Exchange Market)

Forex trading involves buying and selling currencies to profit from changes in exchange rates. It’s the largest and most liquid market in the world. Forex can be a good way to diversify your portfolio, especially if you’re looking to hedge against currency risk. However, it requires a good understanding of global economics and can be quite volatile. This market is best suited for those who are willing to invest the time to learn and stay updated on global financial news. Like cryptocurrencies, forex trading may not be suitable for all investors, particularly those who are new to investing or prefer less risky options.

Why Is Rebalancing Important?

You know the saying: “If you don’t change, you stay the same.” Rebalancing ensures your portfolio doesn’t become stagnant and out of touch with market movements. Without it, you’re basically driving your investment car with no rearview mirror. Rebalancing helps

Prevent Portfolio Drift

Without regular rebalancing, your portfolio might become top-heavy in certain sectors or assets. Imagine if you only held stocks in one sector (say, tech)—that’s a disaster waiting to happen when the market corrects. Portfolio drift occurs when the allocation of your investments shifts over time due to varying performance of different assets. Rebalancing brings your portfolio back to its original or desired allocation, ensuring it remains diversified and aligned with your risk tolerance.

Capture Opportunities

If you don’t rebalance, you miss out on shifting market opportunities. Sometimes the stocks you’ve been holding for years aren’t performing as well as new players, and that’s when a little adjustment can unlock higher returns. By rebalancing, you can take advantage of new investment opportunities and ensure your portfolio is positioned to benefit from changing market conditions. It’s like updating your wardrobe to stay in style—keeping your investments fresh and relevant.

Adjust for Risk

Over time, your portfolio can shift toward riskier assets—like that one time you wore flip-flops during a snowstorm. Rebalancing helps realign your risk profile, keeping things in check. As certain assets outperform others, your portfolio may become more heavily weighted in those high-performing, and potentially riskier, assets. Rebalancing reduces this risk by selling some of the overperforming assets and buying underperforming ones, maintaining a balanced risk level that matches your investment goals and risk tolerance.

The Santa Claus Rally, An Opportunity for Rebalancing

Ah, the holiday season. While most people are looking forward to eggnog and turkey, the stock market has its own way of celebrating—through the Santa Claus Rally. This festive market phenomenon is typically seen during the last week of December and the first few days of January. Let’s dig into why this is an excellent time to review your portfolio:

Historical Insights

Globally, markets tend to rally during this period, with the S&P 500 averaging a gain of 1.3% since 1950. This phenomenon is often attributed to a combination of factors, including holiday optimism, year-end tax considerations, and institutional investors adjusting their portfolios. In the Philippines, the holiday period often sees increased consumer spending, helping drive optimism in local equities. This seasonal boost can be a great opportunity to lock in gains and reassess your asset allocation.

Why the Rally Happens?

Several theories explain the Santa Claus Rally. One is the general sense of optimism and goodwill during the holiday season, which can lead to increased consumer spending and investor confidence. Another theory is that institutional investors, such as mutual funds and pension funds, engage in year-end portfolio adjustments, buying stocks to improve their annual performance reports. Additionally, lower trading volumes during the holidays can lead to less volatility and more upward price movements.

Rebalancing During the Rally

The Santa Claus Rally provides a unique opportunity to rebalance your portfolio. Here’s why:

Locking in Gains, If your portfolio has performed well throughout the year, this rally can be an ideal time to take some profits. By selling overperforming assets, you can lock in gains and reduce the risk of a potential downturn in the new year.

Reassessing Asset Allocation, The end of the year is a natural time to review your investment strategy. Are your current allocations still aligned with your financial goals and risk tolerance? The rally can provide the perfect backdrop for making adjustments, whether that means trimming overperforming sectors or adding more conservative investments like bonds or fixed-income products.

Tax Considerations, Year-end rebalancing can also help with tax planning. By selling assets that have appreciated, you can realize gains and potentially offset them with any losses you’ve incurred throughout the year. This strategy, known as tax-loss harvesting, can help minimize your tax liability.

Practical Steps for Rebalancing

Review Performance, start by reviewing the performance of your investments over the past year. Identify which assets have overperformed and which have underperformed.

Set Targets, determine your target asset allocation based on your financial goals, risk tolerance, and investment horizon. This might involve increasing your exposure to certain sectors or reducing your holdings in others.

Make Adjustments, execute trades to bring your portfolio back in line with your target allocation. This might involve selling some of your winners and reinvesting the proceeds into underperforming or more stable assets.

Monitor and Repeat, Rebalancing is not a one-time event. Regularly monitor your portfolio and make adjustments as needed to ensure it remains aligned with your goals.

Wrap up,

As we wrap up this deep dive into the world of rebalancing, let's take a moment to appreciate the journey. Whether you're a seasoned investor or just starting out, rebalancing is like giving your portfolio a much-needed spa day. It's about taking a step back, reflecting on your goals, and making sure your investments are working as hard as you are.

Remember, investing isn't just about chasing the next big thing or riding the latest wave. It's about staying disciplined, making informed decisions, and sometimes, having the courage to make adjustments when things aren't going as planned. Think of rebalancing as your financial New Year's resolution—it's a commitment to keeping your portfolio healthy and aligned with your long-term goals.

And hey, if you find yourself chuckling at some of your past investment choices, know that you're not alone. We've all had those "what was I thinking?" moments. But that's the beauty of investing—it's a continuous learning process. Each decision, whether good or bad, is a step towards becoming a more savvy investor.

So, as you enjoy the holiday cheer, take a moment to give your portfolio some TLC. Embrace the Santa Claus Rally, lock in those gains, and set yourself up for success in the new year. And remember, rebalancing isn't just a task—it's an opportunity to reflect, learn, and grow.

A bit about me, I'm an avid investor and a capital market observer, ?with a passion for helping others navigate the complex world of finance (with an effort to simplify)?? My motivation comes from a deep belief that everyone deserves the opportunity to achieve financial independence and security. I firmly believe that a great investment is the one we truly understand. This philosophy drives me to continually educate myself and occasionally others, ensuring that we make informed and confident investment decisions.

Here's to a prosperous and well-balanced new year! May your investments be as bright as the holiday lights and as steady as your favorite holiday traditions. Happy investing, and may your portfolio always be in tip-top shape! Thank you for reading this. Happy Holidays Everyone!

Aldrin