Author: therawinformant

Investors are flying blind into the ASX profit reporting season, which officially kicks off in two weeks, but there are three things we are likely to encounter.

I am not talking about volatility, although you can expect a lot of turbulence as the COVID-19 pandemic creates a thick fog of war.

It doesn’t help that the market is pricing in a “V” shape recovery either when a number of key S&P/ASX 200 Index (Index:^AXJO) sectors look to be stuck in an “L” instead.

Not just about profits

While travel stocks like the Qantas Airways Limited (ASX: QAN) share price are the obvious profit season sinners, the outlook for a wide range of industrial and financial stocks are still up in the air.

But the profit figures are only but one thing that impacts on ASX share prices. There are a number of other developments that will drag on stocks, and some of these are easier to predict than earnings.

Capital raising on the rise (again)

One thing I am expecting that will leave a big mark on the earnings season is capital raisings. While we have seen several high-profile companies rattling the can for cash since the start of the coronavirus pandemic, I think we will see more.

My view was reinforced by the share market operator ASX Ltd (ASX: ASX) extending its temporary emergency capital raising relief.

The relief, which is aimed at helping cash-strapped ASX entities hit by CIVID-19 to raise urgent capital, was meant to expire by the end of this month. But it will now be extended to the end of November 2020.

This means we could see more companies take advantage of this window, especially if their auditors are reluctant to sign off on their accounts.

More big write-downs to come

Another likely feature of this reporting season to watch for are write-downs. Companies hit by a sharp downturn in trading conditions will be pressured to devalue assets.

We have already seen this happening in the energy sector. The dramatic crash in the oil price this year forced Woodside Petroleum Limited (ASX: WPL) and Origin Energy Ltd (ASX: ORG) to write-down the value of their assets.

Property groups have also been shaving down the value of their portfolios, although I don’t think they are quite done yet.

I also think that ASX stocks in other sectors will also be contemplating such a move. While the devaluation of assets does not usually impact on cash, the move will impact on bottom lines. It could also endanger debt covenants for companies that have put up assets as collateral.

Limited guidance for FY21

The third feature of the reporting season is earnings guidance – or the lack of it. Any company that was feeling a little more confident about their outlook would likely be pulling their head in after Melbourne went into a second COVID-19 lockdown.

What’s worse, a small but growing number of coronavirus cases in New South Wales will be adding to the suspense.

It will take a brave board to be giving any predictions for FY21 in this climate. As I have reported before, Macquarie Group Ltd (ASX: MQG) is predicting that only half of ASX companies that usually gives guidance will do so this time round.

That figure might even prove to be too optimistic.

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More reading

• How you could have turned $20,000 into $850,000 in 10 years with ASX shares
• These were the worst performing ASX 200 shares last week
• How I’d build a $100,000 ASX portfolio of growth shares
• ASX 200 finishes up 0.4%, Rio Tinto grinds higher
• These ASX stocks are among the most popular buy ideas from brokers today

Motley Fool contributor Brendon Lau owns shares of Macquarie Group Limited. Connect with me on Twitter @brenlau.

The Motley Fool Australia owns shares of and has recommended Macquarie Group Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

The post 3 things that will impact on ASX shares this reporting season appeared first on Motley Fool Australia.

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When it comes to investing, a portfolio rebalance or rebalancing might be a concept you’ve heard of. It’s usually within the boundaries of a professional fund manager’s parlance though, and not something that many ordinary retail investors like you or I might be accustomed to.

So what is meant by a portfolio rebalancing? And more importantly, is it something we should all do?

A rebalancing act

At its core, a portfolio ‘rebalancing’ revolves around the concept of target allocation. In its simplest form, this involves allocating each investment in your portfolio a ‘target size’. If you have 5 ASX shares in your portfolio, it might be 20% each – or 30%, 30%, 20%, 10% and 10% if you so choose. All shares are volatile to an extent, but some tend to be inherently more volatile than others. And this is the concept that rebalancing rests on.

Rebalancing intends to capture profits and mitigate losses – it’s a way of automating the process of ‘buying low and selling high’.

Here’s how it works if you start with 5 ASX shares with the 20% target weighting. If 6 months pass, and one of your shares has appreciated in value so it makes up 25% of your portfolio, while another has lost some value and is sitting at 15%, shares of the winner are sold to return the position to 20%. The profits from this sale can then be used to pull the 15% holding back up to 20%. If you consistently follow this process, it can be a great way to easily manage the emotional difficulties of buying and selling shares.

The rebalancing methodology can be extrapolated out as well. Many investors like to use it with entire asset classes, like shares against bonds, cash or gold (e.g. 80% shares, 10% gold, 10% cash). It’s relatively easy to do with ASX exchange-traded funds (ETFs) that simply track these entire sectors.

Is this strategy worth doing?

Whilst I think there are many merits to investing using a rebalancing strategy, it is by no means a perfect system. If you rebalance too often, it’s likely to be detrimental to your portfolio’s returns because of higher fees and taxes. Taking this one step further, it might not be worth it at all if your portfolio is relatively small.

Many investors don’t like to ‘sell out of winners’ as well. If you had bought CSL Limited (ASX: CSL) shares 20 years ago, for example, you’d be sitting on a far smaller pile of gains today if you gave your position a haircut every 6 months or so.

Foolish takeaway

At the end of the day, it’s your call as an investor whether a rebalancing strategy is right for you. It has many inbuilt advantages, particularly in the fraught area of emotional investing. But equally, it won’t serve the needs of all investors and may not be the right fit for your strategy or portfolio. Over to you!

More reading

• 2 easy ASX shares for beginners
• Where to invest $1,000 into ASX shares immediately
• Why these excellent ASX healthcare shares could be long-term market beaters
• 5 ASX shares with huge moats to own today
• 3 outstanding ASX 200 shares for retirees to buy today

Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of CSL Ltd. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

The post How to rebalance your average ASX share portfolio appeared first on Motley Fool Australia.

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