For investors looking to move some capital around for the year ahead, there are certain strategies that can be implemented. Rebalancing one’s portfolio from time to time is generally a good idea. Personally, I try to do so quarterly, but the end of the year is one of the most important times when I take a hard look at how my holdings line up.
Ensuring one has enough exposure to key trends they want to invest in for the coming year, while also balancing their risk/reward profile is important. We each have unique risk profiles and growth targets, so we need to adjust our holdings to reflect our preferences for the coming year.
Here are two top strategies I personally utilize when rebalancing my portfolio I’d encourage other investors to consider.
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It’s time to revamp one’s valuation models
Stocks are generally valued as the discounted sum of all future cash flows over the long term. In other words, so long as a company is operating, its future cash flows are attributable to owners. As a shareholder in a company, you’re entitled to these cash flows (which are either reinvested in a company’s core business or eventually paid out as dividends).
Thus, revising one’s discounted cash flow (DCF) model annually or quarterly with new growth assumptions is important. Is a company expected to grow faster in the coming years because of its AI integrations? Or are price pressures stemming from bearish market dynamics likely to result in slowing growth?
The other key input into such models is the expected forward “risk free rate,” which is used to discount these cash flows to present day. Typically the 10-Year U.S. Treasury or 5-Year Canadian Bond yield, these rates are important to estimate, and they’ve been changing rapidly. That’s why I prefer a quarterly model revision, but it’s up to each individual investor to decide what’s best for them.
Sector allocations
The other important factor I think is important to touch on is which specific sectors one chooses to invest in over the course of the next year and how that jives with their growth expectations over the long term.
Personally, my allocations don’t tend to change much, though I’ve noticed that simply by letting some winners run, tech exposure has become an increasingly important piece of my portfolio. And because I own mostly ETFs, this means that looking to international funds and other individual stock picks in sectors I want exposure to is important.
I think even passive investors who are mostly invested in index funds (like myself) should consider adding sector-specific ETF exposure to other areas they think could outperform in the years to come outside tech. Given the rally we’ve seen in certain areas of the economy, I think this is the prudent thing to do right now.
