Charles Schwab's chief investment strategist suggests that long-term investors who take a disciplined approach — the firm's "bread and butter" clients — recognize rocky financial markets as a good time to rebalance their portfolios rather than simply reacting.
One action item Schwab has recommended during market volatility, to the extent clients manage it, "for tax implication reasons, other turnover reasons, is volatility can often present itself as an opportunity to rebalance," Liz Ann Sonders noted on a Schwab podcast last week.
"So I call it volatility-based rebalancing, where more quickly your portfolio might get out of whack. Certain asset classes become larger as a share of your portfolio than whatever your strategic asset allocation might be and vice versa in underperforming assets. And it's sort of a quick way we can force ourselves to do some rebalancing, which is a version of buy low, sell high, and add low, trim high," she said.
Exactly how to respond to market volatility like the moves seen last week, though, may depend on an investor's style, according to Sonders.
More active "retail" investors generally like volatility, Sonders noted.
"It's hard to have a trading edge without pops in volatility," which "improves the risk-reward balance, but it also can raise the cost of making a mistake. And that's why you want to be mindful of overconfidence and leverage. Because I think that's what gets punished, when you have these periods of volatility, is either complacency, as we already touched on, or more extreme overconfidence," said Sonders.
"And I think you still, even as (an active) trader, you still want to apply those disciplines. Maybe not long-term strategic asset allocation disciplines, which we talked about with regard to long-term investors, but I think even trading disciplines need to be applied when volatility spikes," she added.
Sonders also suggested income-oriented investors, who might be living off portfolio gains, "avoid forced selling during downturns, maintain that discipline" and focus on having asset classes that tend to stay protected during higher volatility or represent an opportunity.
Schwab Chief Investment Strategist Liz Ann Sonders. Courtesy photo
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