How Rebalancing Helped a Client Manage Market Volatility

We explore how a smart strategy can win around a downturn

The situation. Sarah Dupont (52)*, a marketing executive in France has a €500,000 portfolio (60% global equities / 40% Eurozone bonds), which is experiencing a 5% loss in the current market. Problems include persistently high interest rates (~3.8%), slowing GDP forecasts and equity market volatility. 

Options. With Sarah focused on building retirement income by the age of 65, we reviewed her portfolio with these four approaches in mind:  

• Sell underperforming assets (aka panic selling): This does prevent future losses, but also misses any market recovery and, historically, leads to worse long-term performance.
• Rebalance the portfolio: Sell a portion of fixed income to reinvest in equities while prices are lower, however, it does require confidence and control during downturns.
• Do nothing: Maintaining the 60/40 portfolio avoids emotional decisions, but could mean missing opportunities to buy undervalued assets.
• Increase contributions: Adding funds, if liquidity allows, during downturns can enhance long-term outcomes via lower entry points.

The solution. Based on her 13-year horizon and moderate risk tolerance, we recommended a combined strategy: rebalance back to 60/40, stay the course and make a new €10,000 contribution to capitalise on lower equity valuations.

Rebalancing involved trimming overweight bond holdings and reinvesting into equities, effectively buying low. The added contribution went into diversified ETFs and high-quality dividend stocks. 

Key takeaway. Temporary losses can often create long-term opportunities, but taking the right financial advice is crucial especially during such turbulent periods.

*Names have been changed for confidentiality.