Rebalancing a portfolio is done at both the strategic and tactical levels. Strategic rebalancing involves incorporating long-term factors while tactical rebalancing allows for adjusting the portfolio for more immediate factors.

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In other words, strategic rebalancing takes into account long-term factors and critical investment decisions. Tactical rebalancing is more short-term and aims at taking advantage of temporary mispricing in the market.

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Viraj Nanda, CEO at Globalise has explained various factors that could impact investor portfolio and what should investors do if they have invested money overseas:
 
Climate change is a long-term factor and has the potential to impact investment returns over the very long term. Forget investments, climate change can potentially alter the future of humanity.

On the other hand, chip shortage and Fed tapering are very short-term phenomena. Chip shortage is mainly due to the Covid pandemic. Most of the chips -or more technically -semiconductor components, are fabricated and manufactured in Asia, especially in and around China, Taiwan, South Korea, and Thailand. The covid-driven restrictions on transportation have disrupted the global supply chain. As a result, industries depending on semiconductor chips have been affected. These include appliance manufacturers, smartphone makers, and automobile companies. 

The Fed tapering is also a result of the pandemic. The US Fed began buying increased amounts of bonds to inject cash into the economy to boost spending and revive businesses impacted by the Covid pandemic and its after-effects.  

Now that the pandemic is mostly behind us, a large section of the public vaccinated, and the US economy is on the path to recovery, the Fed no longer needs the extraordinary quantitative easing measures. Hence the decision to gradually reduce the amount of bond buying.

In terms of rebalancing portfolios, depending on the pace of the tapering, one could technically adjust one’s portfolio to take advantage of the short-term impacts.

These would include measures such as reducing exposure to longer-term bonds and other interest-rate-sensitive investments in the portfolio and shifting into short-term fixed-income securities.

Similarly, one could take the advantage of the chip shortage to increase exposure to the semiconductor sector, by buying some of the top semiconductor manufacturers or an ETF that is based on this theme.

Simultaneously one could reduce exposure to the firms that are heavily dependent on the availability of chips and are likely to see their earnings impacted in the next few quarters.

However, climate change must be a core factor in the portfolio construction process. The recently concluded UN summit on climate change – COP26, resulted in countries adopting several new measures to address climate change, reduce emissions, promote clean energy, reduce deforestation and nudge governments to fund many of the above-mentioned initiatives.

These factors are put together to have an outsized impact on the future of investments. These range right from fossil fuel companies, infrastructure providers to mining, electric vehicles, clean energy companies, sustainable farms, water conservation, to aviation and cruising.  

So, rather than looking at just immediate rebalancing, the climate change-oriented factors should be incorporated as a core tenet in the portfolio design phase.