As simple as this concept is, it can be very difficult in practice. One way to make it easier is the process of systematically rebalancing, which may be one of the most underrated strategies in investing. It’s the Hawkeye of investing.
Rebalancing is the process of buying what’s out of favor and selling (at least some) of what is in favor. It’s an important tool that you should not forget about and based on the concept that asset prices eventually revert to the mean. Meaning that the hottest of sectors don’t stay hot forever, and vice versa.
One example of a sector that’s significantly out of favor currently is energy. Because of COVID-19, fewer people are driving or flying for travel, work, and even general commerce. And the prices of many of the large oil companies have been ground lower as if fossil fuels are forever dead.
However, I believe eventually, once we have a vaccine or treatment for COVID-19, commerce and even commuting will come back in a significant way. In fact, if you landed here in Atlanta from Mars and looked at the traffic on Ga. 400, you’d think everything was completely normal. However, the U.S. as a whole still has a long way to go before we see the robustness of the pre-2020 economy.
On the other hand, companies like Zoom have had an enormous tailwind from the increase in remote working and the lack of physical travel. This, of course, has led to a bump in sales and a meteoric rise in its stock. In fact, Zoom now has a similar market cap as Exxon — both are valued at about $140 billion.
No one in their right mind would own Exxon over Zoom, right? Maybe, or maybe not.
Now, I’m not telling you what stocks to buy and sell. This is an educational column, and I’m using these companies and sectors as examples. But I do want to caution you that what may be the brightest star one minute may be falling the next minute, and what’s out of favor in a bad economy may soon come surging back.
Exxon is almost 150 years old, tracing its roots to the founding of Standard Oil in 1870. It remains a critical cog in the fossil fuel industry that still runs over 80% of the power in the world. Zoom, on the other hand, is less than a decade old. Analysts estimate that Exxon could have more than $210 billion in sales next year. Zoom may have about $3 billion.
Is the future for Exxon really that bad, and is the future for Zoom picture-perfect? As an owner of an SUV and a regular user of Zoom ... somehow I doubt it.
This is where the concept of rebalancing comes in. When rebalancing, it allows you to take some of your “superhero” investments and trim them back to feed into other areas of your portfolio that you’re still expecting to make a comeback.
It goes against our human nature to buy into an area that’s underperforming, but we’re not buying for the present. We’re buying for the future.
Although the COVID economy will have many lasting impacts, the surge of video conferencing, disinfectants, and cooking at home won’t last forever. And nor will the doldrums from some areas of the economy like travel, leisure, entertainment, and good old-fashioned stops at the gas station. When that day comes, you’ll be glad that you had Hawkeye (aka rebalancing) on your team in 2020.
Wes Moss has been the host of “Money Matters” on News 95.5 and AM 750 WSB in Atlanta for more than 10 years now, and he does a live show from 9-11 a.m. Sundays. He is the chief investment strategist for Atlanta-based Capital Investment Advisors. For more information, go to wesmoss.com.
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