Rebalance your stocks according to the market

Should an investor, with a portfolio overweight on US stocks, adjust his strategy in the face of rising interest rates?

I have a diversified portfolio invested across equities, fixed income and cash. However, there has been a lot of talk about rising interest rates and the effect on investments. I am overweight on stocks in the United States at the moment. Should I change this given the outlook for this year? PN, Abu Dhabi

The expert advice:

Siddharth Bhatia, the chief investment officer at Guardian Wealth Management

Investors must follow a rigid rebalancing strategy, preferably every six months, thus any over- or underweights will be automatically adjusted. But for those who like to work tactically, the overweight on US stocks should change to neutral weight, as we are now in a very mature bull market. However, in a bull market, the initial phases are when large-cap and good-quality stock names go up in value. Then in later phases we see small-caps and high-growth risky names start moving up.

Finally before a crash, everything starts flying higher for no reason at all. This happens when more and more retail investors get brave and dip in. We are not yet in that bubble formation, so US stocks still need to remain in a portfolio, albeit some stock-specific shuffling is recommended. Also, timing markets has academically proven to be futile. Last year everyone was convinced bond prices would tumble in 2014, but instead they performed very well.

Broadly speaking, if stock earnings disappoint this season, then there will be a correction. On the other hand, the euro zone, China, Japan and now India have all started easing cycles. Thus, there is ample support and easy money from the other world central banks.

Speaking of rising interest rates, they surely bring only one thing – volatility. The direction of stock markets does not U-turn on the first instance of a rate rise, at least historically. If the investor is savvy, then one can keep a cash buffer and watch the markets, as the ensuing volatility will surely create buying opportunities – even in US markets.

Another factor is to watch for currency exposure. A US investor must not take any sterling or euro currency positions, as he or she will be hurt in currency fluctuations. Also, commodity prices have fallen so much that a lot of good value has started appearing in some of the big energy names.

The reader’s advice:

Jeffrey Fuller, Dubai

Investment is more of an art than a science because no one can predict the future with any accuracy. Therefore, like you have done, it is best to diversify unless you have the stock-picking skills of Warren Buffett.

You are right to be concerned about the rising valuations of US equities and the fantastic bull run the S&P 500 has had since 2009. Whether you should reduce or not is a matter of personal choice and if you are more seduced by the arguments of the bulls or the bears.

In a nutshell, the bulls predict increasing gains for US equities. They argue that global economic growth is mostly coming out of the US, where the Federal Reserve is keeping interest rates low to stimulate economic growth.

The bears say that valuations of equities are becoming overheated and that the plunge in oil will cause consumer prices to fall, making real interest rates higher and loans more difficult to pay back. That might trigger debt defaults and corporate bankruptcies and lead to falling valuations.

On a price-to-earnings ratio basis, there is no denying that US stocks are not the cheapest in the world. There are stocks in countries including Russia, Nigeria and even in a number of Arabian Gulf countries that offer higher yields and lower valuations because the pillar of their economies, oil, has lost a lot of value in a very short space of time. Again, this comes down to your appetite for taking on risk.

The next Money Clinic:

I want to sell my apartment in Dubai but I feel anxious about using an agent to market the property as I have heard too many horror stories about real estate companies here. Is there a way I can bypass the agent, and the accompanying fees, and sell the property myself? PK, Dubai

Every three weeks The National features a reader’s personal finance problem. If you have an issue or would like to suggest a solution for another reader’s concern, write to [e-mail]