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Abu Dhabi, UAEWednesday 19 December 2018

With higher rates looming, should I rebalance assets?

With a lot of talk about the Federal Reserve soon raising interest rates in the United States, is it a good time to rebalance investment portfolios?

There is a lot of talk about the Federal Reserve soon raising interest rates in the United States. Does this mean it’s a good time to rebalance my investment portfolio? And if so what is the best strategy to weather the rate hike? NB, Dubai

Expert one

Chris Ferguson is the managing director at Credence International, a financial planning and wealth management company based in Dubai.

You are correct there is a lot of talk of a US interest rate rise and there has been for some time. There have also been a few events in the time since you actually asked your question that may discourage this action. These include falling commodity prices and the devaluation of China’s currency. The reality is that if rates do rise then it will be a gradual rise rather than a sharp spike. Economies are too sensitive for any big movements. Although there is good jobs data at the moment, there is not inflation to match, which would be the reason for a rate hike. There is also widespread skepticism that inflation will increase over the next decade.

So in answer to your question, is now a good time to rebalance your portfolio? This really depends what you are currently invested in, what your objectives are and when you hope to meet them. A lot of what you read on the web is already priced into markets, and to react to speculative data can cost you. It is always a good time to assess your portfolio, but avoid overreacting to what you read. If your portfolio is well balanced then it will have negatively correlated assets and therefore when one asset loses out another can be a winner. The important factors are to know what you own, why you own it. If your plans have changed then perhaps your portfolio should, too. But ultimately, it is best to align your money to yourself rather than trying to react to potential market movements.

Expert two

Andrew Prince, a financial planner at deVere Acuma financial consultancy in Dubai.

Asset allocation relies on the notion that different asset classes offer returns that are not perfectly correlated, and diversifying portfolios across asset classes will help to optimise risk-adjusted returns.

All very good I hear you say, but what does that and rebalancing mean to me?

Let’s take a simple example of US$100,000 invested with 50 per cent allocated to bonds and the other 50 per cent to equities. One year later your investment is worth $110,000. A healthy return; however all of the growth has come from equites, so now you have nearly 60 per cent of your portfolio in an arguably higher risk asset class. You are now “un-balanced”.

To “rebalance” your portfolio, we would seek to bring it back to the original 50/50 investment strategy. In other words, bank some of the profit from the equity gain and reinvest it into bonds.

So what does this mean for you and the much anticipated rise in US Federal Reserve rates? Let me first say that markets have been anticipating a rise for well over a year, and therefore an increase won’t come as a surprise. We do know that different asset classes react in different ways and some will benefit from a rate rise while others will suffer. Dubai, the UAE and other emerging markets will react depending on two primary factors: Reliance on commodity prices and foreign currency debt exposure, especially US dollar denominated. For example, in India, a net oil importer but which also has a large amount of dollar debt, the government will be balancing the two opposing factors carefully to help stimulate the economy and reduce exposure to debt. Other emerging markets will fare less well.

No matter where your money is investment, don’t put all of your eggs in one basket and rebalance your portfolio at least annually.

Next Money clinic:

I have begun thinking seriously about buying a home rather than renting and have started saving for a deposit. If I can allocate Dh10,000 per month and need a property in Abu Dhabi of at least three bedrooms, how should I structure my plan to save a reasonable amount in the quickest time? BB, Abu Dhabi

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