Consider tactical asset allocation, which involves making modest, temporary adjustments within your investment portfolio relative to your long-term target allocation.
Dollar-cost averaging, which involves investing a portion of the cash balance into the target portfolio through regular intervals, may help to manage investment risk as the market moves up and down.
Rebalancing among asset classes with the most significant differences in return and risk, such as stocks and bonds, can enhance long-term returns and is effective at managing portfolio risk.
The performance of capital markets in 2023 differs materially from what investors experienced in 2022. Throughout most of the previous year, few safe havens could be found, as most major asset classes, including stocks and bonds, suffered setbacks. That’s unusual, as historically, for example, bond markets typically provide positive returns within a diversified portfolio to help offset a downturn in stocks. However, high inflation, rising interest rates and the Russia-Ukraine war all contributed to downward pressure on both bond and stock prices. In the first half of 2023, the broad stock market rebounded significantly, due in large part to impressive performance among a select group of stocks, mainly in technology-related firms. During that time, bond markets generated only modest returns. While that represented a notable improvement over 2022’s disappointing results, the fixed income market paled in comparison to the stock market’s strong start. While recent market performance may encourage investors, they should remain prepared for a potentially volatile path forward.
“It’s important to recognize that the market environment and the underlying economy are different today from what existed prior to 2022,” says Rob Haworth, senior investment strategy director at U.S. Bank. “Given what has transpired since the beginning of 2023, investors should review their portfolios and determine if it is still appropriately allocated among major asset classes.”
“It’s important to recognize that the market environment and the underlying economy are different today from what existed prior to 2022.”
Rob Haworth, senior investment strategy director at U.S. Bank Wealth Management
Here are three situational approaches to consider in the current market environment:
“Periodic rebalancing across asset classes with the most significant differences in return and risk, such as stocks and bonds, enhances long-term returns and is effective at managing overall portfolio risk,” notes Haworth. “We first suggest evaluating your relative stock/bond allocation and using recent performance differences to nudge your portfolio back toward its target allocation. Additionally, within an asset class such as mid-cap U.S. stocks, we suggest examining allocations where growth and value style performance has materially diverged,” he says. Notably, some growth-oriented S&P 500 sectors, such as Technology, that were hard hit in 2022 bounced back in 2023’s first six months. Even in that short period of time, you might find some of your portfolio positions out of balance. “Make sure you own what you want to own,” says Haworth. “If you have significant positions in assets that have become expensively valued, you may want to reposition those holdings as a way to help manage portfolio risk.” The table below details performance across a variety of asset classes (represented by market indices) through July 12, 2023.
As you seek to properly position your portfolio, consider tactical adjustments to take advantage of specific opportunities that have emerged in today’s market. Utilize dollar-cost averaging of your available cash to put money to work systematically over time and limit the potential downside risk of a large, lump-sum investment. And rebalance your portfolio positions to align your asset mix with your goals, time horizon and risk tolerance.
Your wealth management professional can be instructive in helping you blend and select strategies to keep your portfolio on target to help meet your long-term investment plans and goals.
The resurgence of inflation combined with rising interest rates creates challenges for investors in 2022. These tactical considerations can help you navigate today’s unique market dynamics.
Don’t let market volatility and an uncertain economic outlook derail your disciplined investing strategy.