Rebalancing Portfolios

A How-To Guide for Rebalancing Portfolios

Enhance your portfolio decisions at every level with Fidelity's industry-leading insights

Did you know that rebalancing is the Number 1 reason advisors are making changes to their portfolios right now?1

76% ofInvestment Professionalssay that inflation hedge is the main reasonthey’re currently making portfolio changes

If you're in that group now or plan to rebalance soon because of recent volatility, data-driven research and insights from Fidelity's Asset Allocation Research Team (AART) can help. Here are three key steps to making informed investment rebalancing decisions in any market environment.

1. Start with Tactical Additions to Your Portfolios

Fidelity recommends reviewing:

  • International exposure
    Most portfolios are already underweighted to international. Fidelity's Asset Allocation Research Team (AART) aims for 30%–40% of an investor's equity portfolio be allocated to international.

  • Inflation protection
    While inflationary pressures often recede during recessions, Fidelity believes greater policy experimentation and peak globalization trends will eventually cause higher-than-expected inflation rates long term. Options designed for inflation protection, such as TIPS and gold, are relatively inexpensive now.

  • Active equity
    Tactically, active and passive equity outperformance varies over time, but active often wins during recessions. Given the high number of unprofitable companies before COVID-19 emerged, active equity's outperformance seems likely to continue.

How Much International? Aim for 30%–40%

Total Allocation to Equities
Fidelity Freedom Funds Target Asset Mix2

60% U.S. | 40% NON-U.S.14%20%20%31%36%54%90%AGE 4551%AGE 6534%AGE 75ACCUMULATIONAT RETIREMENTIN RETIREMENTNon-U.S.U.S.EQUITY MIX

2. Explore Near-Term Asset Allocation Shift

Recent volatility has many investors wondering where we go from here. With the global economy in recession, there’s no evidence yet of a sharp recovery. Our Asset Allocation Research Team (AART) believes:

  • Uncertainty and volatility will probably remain high—a more cautious near-term portfolio tilt may be warranted.

  • More defensive assets, like high-quality bonds and non-cyclical equity sectors, tend to do better during economic contractions.

  • The biggest effect of COVID-19 on companies will be a negative demand shock. While some non-cyclical sectors such as health care may see higher demand, ply-chain issues and lower demand will likely weigh heavily on profits.

Fidelity Analyst Survey: What is the largest impact on companies from COVID-19

Cyclical SectorsDefensive SectorsTotalLowerDemandHigherDemandSupply ChainIssuesFinancialIssues0%10%20%30%40%50%60%70%80%Percentage ofRespondents3

3. Consider Business Cycle Context for the Intermediate Term

The business cycle reflects aggregate fluctuations in economic activity—a likely critical predictor of intermediate-term performance (3 to 5 years). Investors can use this lens to overweight asset classes that tend to outperform during a given cycle phase and underweight those that usually underperform.

  • Stocks have consistently performed better earlier in the cycle, whereas bonds tend to outperform during recession.

  • Because equities tend to peak in late cycle, the outlook for risk assets improves incrementally when starting in recession, with higher expected intermediate-term results.

  • Economically sensitive sectors historically have performed better in the early and mid-cycle phases of an economic expansion. Meanwhile, defensive sectors with relatively more stable earnings growth have tended to outperform in recession.

Historically, performance of stocks and bonds has been heavily influenced by the business cycle.

Asset Class Performance across Business Cycle Phases 1950–2010 4

-7%5.5%14%25%13%4%5.5%6%6%6%4.5%4%StocksBondsCashRecessionLateMidEarly

Asset Allocation Research Team (AART)

Read the latest Fidelity Asset Allocation Research Team (AART) insights and learn more about their approach to business cycle investing.

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