David A. D’Ambrosio, BridgeTower Media Newswires
With the recent market correction and volatility increasing more this year than in the past, many investors are wondering how to position their portfolio going forward. This month will mark the ninth anniversary of this long-term historical bull market. The fundamentals are there for this current market to grind higher going forward, but it is always a wise step to review your asset mix and goals to make sure you are comfortable with your portfolio. Surprises can occur to derail the market; listed below are a few steps you can review and consider.
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Rebalance
No matter how the market performs, there is always an opportunity to review one’s portfolio to make sure it is in line with your current goals and objectives. Now would be an excellent time to rebalance your portfolio back to your investment risk level. If you are comfortable with a 60% equity allocation, your portfolio percentage in stocks is probably higher than its target due to the run-up in the stock market over the past number of years. If so, you should consider rebalancing by selling equities and buying fixed income securities or bonds. This will allow you not to take an unnecessary amount of risk in your portfolio. You should at least annually rebalance your portfolio to ensure your target asset mix is in line with your comfort level.
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Diversify
Now that you have rebalanced your asset mix back to its stated allocation, the next step is to review your current holdings to determine if you are overly exposed in one asset class and under allocated in another. For example, do you have enough international securities in your portfolio? If so, how much of a mix in international equities should you have? International securities are one asset class most investors omit from their portfolio. We believe it is ideal to have at least 30% invested in international securities to obtain the necessary equity diversification. Studies have shown that having a certain level of international securities will help lessen the risk in portfolios and improve long-term returns.
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Fixed income securities
Bonds are in the news lately with the recent rise of interest rates, but they usually go unnoticed when analyzing performance and portfolio structure. Bonds have an inverse relationship with rates; when rates rise, bond prices fall and vice versa. That does not mean you should abandon bonds altogether if we are heading into a rising rate environment. Bonds as an asset class are less risky compared to stocks and provide a stream of income to investors. What you can do right now is review your bond portfolios and determine the current duration of the bond holdings. Duration is a measure of the sensitivity of the price of the bond. Longer duration securities will be more susceptible to a fall in price than shorter duration bond securities. Investors and other investment managers often overlook bonds, but they have a critical role in a diversified portfolio and need to be reviewed when rebalancing your portfolio.
Another bond issue is taxable or tax-exempt securities. Taxable bonds will create taxable income, and tax-free or tax sensitive bonds will typically produce income that is tax-free. It is generally recommended that individuals in high tax brackets or high tax states have an allocation in tax-exempt bond securities in their portfolio because of the taxation. Take the time to review your bond holdings and work with your advisor and accountant to determine if it still makes sense to have taxable or tax-exempt bonds for your investments.
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Advisor
If you seem overwhelmed with your portfolio, seek a qualified investment advisor for their assistance. The long-term track record of the investment firm you are working with should be a top priority, but also find someone who can teach you about the markets and investments. Work with an advisor who speaks with you and not over your head. The schoolteachers that we remember are the ones who took the time to explain things in a clear and concise matter. Look for that quality in advisor as well. You will not only build more trust in your relationship with your financial professional, but also increase your learning level in investments.
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David A. D’Ambrosio is an assistant vice president at Karpus Investment Management, a local independent, registered advisor managing assets for individuals, corporations, nonprofits and trustees. Offices are located at 183 Sully’s Trail, Pittsford, NY 14534; phone (585) 586-4680.
