Tending to your Portfolio in an Up Market
The equity markets have had a pretty strong run to start the year, and while that’s a nice change, investors shouldn’t assume they can now place their portfolios on autopilot or stray from their long-term investment strategy. In fact, whenever the market experiences significant positive (or negative) moves, we encourage people to take action in several ways:
1. Remember to rebalance
In an up market the equities portion of a portfolio can grow beyond an intended asset allocation based on someone’s risk tolerance and objectives. Today with U.S. large cap, small cap and international equities all posting near double digit returns year-to-date (as of March 23, 2012) investors may be taking on more risk than originally intended and may not even realize it.
The end of a strong quarter for the market is a good time to look closely at your asset allocation to see if some rebalancing is in order. That might require making some hard choices about selling higher-performing investments to reallocate money elsewhere – something that can be counterintuitive and difficult for many investors but can help lock in gains and avoid the temptation to chase performance. Remember, keeping the status quo is a decision as well and may sometimes be the right one, but just be sure you understand why you’re doing what your are (or aren’t) within the context of your portfolio.
2. Stick to YOUR plan
Experts always talk about diversification in investing, but there’s a good reason – it’s a key component of a sound long-term investing strategy. There are a lot of asset allocation models and strategies to choose from but there is only one you. So having an appropriately diversified asset allocation across equities, fixed income and cash based on your particular risk tolerance and objectives is key, and frankly shouldn’t change just because the market does. In a period of positive market movement, it can be especially tempting to chase positive returns causing you to potentially take on more risk than intended.
Nearly everyone is comfortable taking risk when the market is going up. It’s when the market goes down that most investors come to know their true tolerance for risk. Three good questions to ask when considering an investment are “How does this investment fit with my portfolio? How do I expect this investment to perform? What are the implications if it doesn’t perform as expected?” The answers to these questions can help you decide how and if the investment has a place in your portfolio.
3. Have a “total return” approach to your portfolio
Especially in today’s environment, everyone seems to be looking for yield – another way of saying dividend and interest income. But investors should remember two things. First, yield tends to correlate to risk. It’s difficult get one without the other, and it is important to find the right balance. Second, yield is just one element of a total return strategy that should also take into account capital gains. In extended periods of market volatility such as what we’ve experienced over the past few years, combining both components in a total return approach can help smooth some of the year-to-year variations in your income stream or portfolio value.
By the way, we think these tips make sense in almost any market environment and should serve as important cornerstones of any investment portfolio. But in periods of significant market increases and decreases, they can play an even more critical role in ensuring your investment approach doesn’t stray too far off its long-term path. Determining the right asset allocation for you, sticking to it, and utilizing both price growth and the income payments from a portfolio can help minimize the emotion involved in investing decisions, which for most of us is a good idea!
The information here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The type of securities mentioned may not be suitable for everyone. Each investor needs to review a security transaction for his or her own particular situation.
Diversification strategies do not assure a profit and do not protect against losses in declining markets.