Market Levels Suggest It May Be Time to Rebalance | American Funds

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Investment Insights

July 2017

Market Levels Suggest It May Be Time to Rebalance

U.S. stocks have outpaced overseas markets. The resulting gap in valuations may have affected your portfolio’s asset allocation. As international stocks pick up steam, consider doing some rebalancing.

In the last 25 years, the stock market has experienced several bull markets — from the 1990s tech boom to the current eight-year rally. In the midst of such bullish periods, it can be tough to reduce exposure to an asset class that’s on a tear, because you may fear missing out on further growth.

But current market levels suggest you may want to consider rebalancing your portfolio. Historically, bringing allocations back into balance with your investment goals has resulted in a comparable level of risk, but a higher return, according to research from Capital Group.1

Sources: Stocks are represented by MSCI World Total Return Index. Bonds are represented by the IA SBBI U.S. Intermediate-Term Government Bond Index.

The Global Economic Future Seems Bright

For the first time in years, the world’s major economies are on the same road to recovery — just travelling at different speeds. The U.S. economy has been in the lead and is now firing on all cylinders. Manufacturing, capital spending and earnings have positive momentum, while retail sales and wage growth are also strengthening, pointing to continued growth. But can this pace of growth continue?

“The world has shifted, and today global growth is in ascendance,” says Steve Watson, a Capital Group portfolio manager based in Hong Kong.

For example, the industrial sector is driving growth in Germany, France and the UK. Europe’s recovery appears to have turned a corner. Companies may get a further lift as consumer spending picks up. Companies in the euro zone are seeing a significant improvement in earnings growth, which reflects a stronger macroeconomic environment.

Meanwhile, merging economies are also potential standouts. Supported by a sustained stimulus program in China, demand for a range of commodities is accelerating. “A number of emerging markets are seeing better economic growth and rising consumer spending,” says Capital Group portfolio manager Lisa Thompson.

Better Value May Be Found Abroad

U.S. stocks enjoy support from the current economic environment, gaining 13.7% annually over the last five years, compared with just 1.5% for emerging markets. U.S. stocks have also outpaced their European counterparts for eight years.

However, valuations are stretched. Can U.S. markets continue their winning streak? “I am finding it easier to identify attractively valued companies abroad,” notes Steve.

Are U.S. Markets Nearing the Top of Their Historical Range2

chart-relative-market-caps.378x398-v1

Sources: MSCI; RIMES; Thomson Reuters.

Is It Time to Rebalance?

A key part of a long-term investment strategy is diversification, which helps balance risk and returns by spreading your investments across different types of assets. Assuming you’re invested in a good mix of stocks and bonds ― both domestic and global ― some assets in your portfolio have been outpacing others. Therefore, your original allocations to different asset classes and geographies may have shifted over time.

The current U.S. bull market began in March 2009, for example. If you haven’t adjusted your investments over the past several years, domestic stocks will account for a larger proportion of your portfolio than you may have intended, and your allocation may no longer be appropriate for you. Rebalancing can help your investments stay aligned with your goals.

The example below illustrates how a portfolio could be affected by market fluctuations when an investor isn’t adjusting asset allocation. Keep in mind that diversification goes beyond stocks and bonds. Within each of those categories, investors may diversify further. Stocks could include companies across different countries, and international investments may move in different cycles than domestic ones.

Without Regular Rebalancing, Your Portfolio Could Shift

chart-RebalancingAllocation-367x223-v3B

Many experts suggest you should consider rebalancing if the funds in your portfolio have changed more than 5% to 10% from their original allocations. It's important to remember, though, that if these investments are outside of a tax-qualified retirement plan, rebalancing likely will have tax consequences. You should review your portfolio with a qualified tax professional and your financial advisor before making any decisions. If you decide to rebalance, exchange some of your investments from funds whose allocations have increased to funds with allocations that have decreased.

It’s a good idea to review your investment allocations at least once a year. In addition to rebalancing on a one-time basis, some plans enable you to automatically rebalance annually or even quarterly. Keeping an eye on where and how you are invested ― and maintaining an appropriate asset allocation ― can help you weather the inevitable ups and downs of different markets and keep you on track toward your financial goals.

Learn More at Capital Ideas

Consider four key themes and investment implications for the balance of 2017.

Read: Midyear Outlook

1Results reflect the reinvestment of dividends, interest and other earnings. In this example, rebalancing occurs at each month-end when equity allocation moves above 66% or below 54% of the total portfolio. Volatility measured by standard deviation. Rebalancing assumes allocations are returned to their target levels. The market indexes are unmanaged and, therefore, have no expenses. Investors cannot invest directly in an index. Past results are not predictive of results in future periods.

2Market capitalization ranges represent each region’s percentage of the total market capitalization for the MSCI All Country World Index for the 20 years ended 5/31/17.

MSCI has not approved, reviewed or produced this report, makes no express or implied warranties or representations and is not liable whatsoever for any data in the report. You may not redistribute the MSCI data or use it as a basis for other indices or investment products.


Investments are not FDIC-insured, nor are they deposits of or guaranteed by a bank or any other entity, so they may lose value.

Investors should carefully consider investment objectives, risks, charges and expenses. This and other important information is contained in the fund prospectuses and summary prospectuses, which can be obtained from a financial professional and should be read carefully before investing.