As we head toward the end of the first quarter of 2017, the U.S. stock market has been on a wonderful, remarkable upswing since the November election. Most stock investors have seen their portfolio value increase and confidence in the market and future outlook remains high at this point. But some questions do need to be asked on how your portfolio is positioned currently and what changes, if necessary, should be made. Also, what is your adviser currently recommending? And should you reduce your stock allocation due to recent market highs? These are just a few questions that are being asked of advisers and investors alike. All of these questions are prudent and need to be asked now rather than later, when markets could head in the other direction. Here are some thoughts to consider for your portfolio:
Now is a perfect time to rebalance your portfolios. For example, a typical 60% stock, 40% bond allocation back in the fall may now be 65% in stocks and 35% in bonds due to the recent stock market gains and bond market volatility. It would be wise to take the gains from the stock side of the portfolio to rebalance your portfolio back to its targeted objective. It would make sense to do this now instead of doing the opposite, which most investors do. Rebalancing should occur at least annually and by doing so you set your portfolio allocation back to its stated target objective and your risk tolerance comfort level. Ask your adviser if rebalancing is being done in your account. Or, if you manage your own portfolio, be disciplined and take the emotion out of rebalancing your account.
Reducing equity & bond market risk
This month marks the eighth anniversary of the current bull market, which is one of the longest-running bull markets we have seen in quite a long time. Most advisers agree that bouts of volatility will be more prevalent going forward than what we have experienced in the past eight years. So, if that is the case, what is your adviser doing now to help limit risk in your stock portfolio? Adding alternative funds and other equity preferred securities that do not necessarily move in lock step with the overall stock market is one way you can reduce market risk. Alternative funds can act as a hedge position by maintaining equity exposure but with less volatility than the broad stock market.
In addition to stock market highs, the bond market has seen some downward pressure. The Federal Reserve is forecasting higher interest rates, which will put a strain on typical bond portfolios. When interest rates rise, bond prices fall. Bonds with a higher duration will fall more than bonds which are shorter in nature. Duration is a measure of interest rate sensitivity of fixed income securities. Every bond will have a duration feature tied to it. Longer-term bonds are subject to greater interest rate risk than bonds which are shorter in nature. With that being the case, how are your bonds in your portfolio being positioned? Do you know what the overall duration of your bond portfolio is? Most investors just focus on the stock side of their portfolios but overlook the bond side of their portfolio, which is equally important.
No one can predict stock or bond market movements or how the central bank actions may affect future returns. But having an ongoing dialogue with your adviser and talking about what is being done to your portfolio will help limit any uncertainty and surprises.
David A. D’Ambrosio, is an Assistant Vice President, at Karpus Investment Management, a local independent, registered investment adviser managing assets for individuals, corporations, nonprofits and trustees. Offices are located at 183 Sully’s Trail, Pittsford, NY 14534 (585-586-4680).