Don’t Be Scared to Re-Allocate Your Portfolio

Don’t Be Scared to Re-Allocate Your Portfolio

If your portfolio is loaded up with tech stocks, it’s time to reassess

The performance of the U.S. equity markets has been strong in 2021. In fact, the major U.S. equity markets have reached new highs, spurred on by a continued economic recovery, improved unemployment numbers and an accommodative Federal Reserve.

As we enter the final quarter of the year, it might be time to take a hard look at your portfolio allocation to make sure you are properly positioned to minimize risk and protect it from potential market troubles.

Most investors recall the Covid-19 driven market declines in early 2020, but it doesn’t take a pandemic for market volatility to increase. Do you remember   Thanksgiving week in 2018? The S&P 500 went negative, led by the group of tech stocks which officially entered bear market territory after dropping more than 20% from their 52-week highs?

Do you remember that shortly after Thanksgiving 2018, the S&P 500 kept posting red numbers on its way to a -9.2% return for the month of December 2018?

Hopefully, you will remember this: the best way to protect your portfolio from unexpected market volatility is through smart asset allocation, aided by diversification and rebalancing.

Diversification and Asset Allocation

Diversification means the mathematical process of reducing risk through the use of many different types of assets. Diversification combines mutual funds, ETFs, closed-end funds, stocks, bonds and other securities that are not correlated. In other words, one asset class typically zigs while the other zags.

Asset allocation is when risk versus reward is balanced, according to the risk capacity, risk tolerance, time frame and goals of the investor. Many people believe that when they have more investments, it means they are more diversified.


Asset Allocation Basics

When allocating assets, you need to do two things:

  1. Find asset classes that are distinct and don’t overlap. You are not as diversified as you think if they do.
  2. Examine how they interact with each other. Different classes tend to do different things at different times.

So, it is not necessarily how many positions you have in your portfolio, but what makes up the contents of the positions to begin with. You have the entire global economy to locate them. You could cut the portfolio into very tiny pieces. However, those likely would be similar to other tiny pieces nearby.

The Big Picture

Work from the broader big picture on down, using specific investments for defined asset classes. And pay attention to rebalancing.

Rebalancing is a financial planning tool designed to get your portfolio back to your original allocation target. Why? Because with time your allocation drifts, and you take on a different risk profile as a result of this drift.

A Sample Portfolio

You might choose to invest in individual stocks, or perhaps you prefer to use index funds, or actively managed mutual funds – or maybe a combination of all these. The specific investment choices have their own individual positives and negatives, and the choice you select may depend upon your personal preference, the size of your portfolio, etc. The important point is to choose wisely.

Let’s also assume you have a global asset allocation with exposure to many different asset classes. What happens when, say, your Energy fund declines and now makes up a smaller piece of your portfolio than you want in your asset allocation?

Or if the Information Technology portion of your portfolio is too big?

Your next step is to rebalance.

You sell off a portion of your portfolio that has expanded too much and buy into the asset class that has declined. In other words, you sell some of the Information Technology index fund and buy more of the Energy index fund (this is just for illustrative purposes and not a recommendation to buy or sell one asset class for another by the way).

Remember the old saying, “Buy low, sell high?” Well, rebalancing means you are doing just that, except you sell high first, then buy low. You sell some of what has gone up to buy more of what has gone down, thus restoring your desired asset allocation pie and remaining consistent with your risk profile.

But beware: selling “winners” and buying “losers” goes against the grain emotionally, of course. So, you make this a regimen in order to eliminate some of the emotional challenges.

Portfolio Allocation and Financial Planning

You might be able to construct a solid portfolio allocation on your own. It will take some pretty dedicated research into the various asset classes, and then you’ll have to make some assumptions about your future asset growth and income needs. But having the assistance of a good financial planner can make this process a lot easier.

  • Talk to your financial advisor about different types of assets available. (allocation).
  • Ask questions about the ingredients your financial advisor uses to make portfolio allocation (diversification).
  • Recognize that sometimes you need to reduce the amount of the best performers and add more to the under performers. (rebalancing).

But most importantly, know that your financial advisor at YHB Wealth will create an asset allocation specifically tailored to your needs. (financial planning). For more information, feel free to contact us.