Key takeaways

  • Periodic portfolio reviews are vital for investors to help ensure their assets are properly positioned consistent with the goals identified in their financial plans.

  • Investors can position assets for long-term success regardless of current market conditions.

  • Tactical portfolio adjustments, dollar-cost averaging and rebalancing are three approaches investors should consider in fine-tuning their investment approach.

Capital markets performance is unpredictable in the short term and results can vary from year-to-year. While investors should structure portfolios with long-term goals in mind, there are times when tactical adjustments can be made to fine tune a portfolio. Investors today may want to consider factors such as inflation, elevated interest rates and improving corporate earnings as they consider opportunities to implement short-term portfolio adjustments.

Investors have experienced dramatically different results in the investment markets between 2022 and 2024.

Chart depicts performance of stocks and bonds 2022 - 2024 as of 5/20/2024.
Sources: Stocks – S&P 500 from S&P Dow Jones Indices. Bonds – Bloomberg U.S. Aggregate Bond Index from WSJ.com. Data as of 12/31/22, 12/29/23 and 5/20/24.

“The stock market came back a long way in 2023 and so far in 2024,” says Rob Haworth, senior investment strategy director at U.S. Bank. “Given what has transpired since 2022’s bear market, investors should review their portfolios and determine if it’s still appropriately allocated among major asset classes.”

 

Strategic portfolio positioning

The primary driver of an investor’s asset mix should be long-term, strategic positions designed to be held over time to meet specific investment objectives. U.S. Bank considers the following to be core components of most well-diversified portfolio:

  • Equities. Over the long run, stocks have generated strong returns, driving the majority of portfolio gains over most business cycles. While stocks can be volatile and cause portfolio declines from time to time, they remain crucial return-drivers that can help meet many investors’ long-term goals. Strong consumer spending, corporate earnings growth, and fiscal stimulus post-COVID has helped support the U.S. economy and equity market performance.
  • Fixed income. Over time, high quality bonds provide important portfolio diversification and stable current income. These two features make bonds a key component of diversified portfolios. Bonds provide portfolio diversification due to often having an inverse price relationship with stocks. While stock and bond prices don’t always move in opposite directions, they do act differently over time, and provide investors opportunities to rebalance into stocks after a stock market correction. “Investors trying to preserve a conservative portfolio profile can take a little less risk and invest in fixed income instruments today generating yields in the 5% range,” says Haworth. That’s significantly higher than yields were prior to 2022, as higher inflation drove the Federal Reserve to raise interest rates, in turn driving bond yields higher.
  • Real assets. Real assets represent investments such as real estate, global infrastructure, and commodities and can help balance a portfolio predominantly made up of stocks and bonds. Some real asset categories provide important income and performance diversification during times of elevated or rising inflation.

 

Situational strategies

The market environment can also create specific opportunities or ways to help you position assets in a more effective way for a shorter period of time. Here are three situational approaches to consider in the current market environment:

Tactical asset allocation

There may be opportunities to make minor yet important adjustments to the broader, long-term positions represented in your portfolio. However, investors should pursue such short-term tactical moves with prudence. “Specific tactical moves designed to capture a market opportunity within any of those asset classes require investors to be nimble and willing to move quickly in and out of specific positions,” says Haworth.

For example, in today’s environment:

  • Large U.S. stocks: Equity investors may want to consider a modest tilt toward stocks over bonds. Since a standard index fund features overweight positions in the largest stocks that have already earned outsized returns, investors should consider a fund that offers equal-weight exposure to large U.S. stocks. The largest corporations are less interest-rate sensitive, as many extended debt maturities and locked in low interest rates for longer terms prior to the Fed’s interest rate policy change. These companies also tend to have large cash balances, which are currently earning more than 5% interest.
  • Commodities: Offer more consistent inflation sensitivity, even if economic growth slows, based on historical analysis. In the current environment with inflation remaining stickier than many anticipated, commodities can provide unique portfolio benefits.
  • Treasury Inflation Protected Securities (TIPS): Inflation-sensitivity can be addressed with a position in TIPS. These government-backed bonds historically offer less protection against high inflation than commodities, but feature less portfolio volatility, making them appropriate for more conservative portfolios.
  • Residential mortgage bonds: Non-taxable fixed-income investors may want to consider residential mortgage-backed securities that are not backed by the government, which have strong fundamentals and offer competitive current income. These securities are particularly attractive given low mortgage loan balances relative to home values and strong incentives for homeowners to remain current on low fixed rate mortgages they locked in prior to the onset of higher interest rates.
  • Municipal bonds: Tax-aware investors can earn extra potential returns by slightly extending maturity profiles in municipal bond holdings and incorporating a modest allocation to high-yield municipal bonds. While these are on the riskier end of the tax-free bond spectrum, Haworth says credit quality is holding up well in today’s economy and defaults remain low.
  • Insurance-linked securities: Tied to the sale of reinsurance products, these securities can offer highly competitive income streams in the current environment for certain types of investors, particularly within trust portfolios.

Dollar-cost averaging

Investors can accumulate cash in their portfolios through interest, dividends, or through security or business sales proceeds. Investing cash into higher returning asset classes such as equities is key to meeting long-term financial goals. However, markets may still exhibit volatility from time-to-time, which can affect investors’ willingness to put lump sums to work in assets subject to fluctuation such as stocks.

Dollar-cost averaging is a strategy that may increase your comfort level with equity investing during volatile times. This involves investing a portion of your cash balance into the target equity portfolio through regular intervals rather than trying to invest the cash all at once (a practice called lump-sum investing).

“Dollar-cost averaging is a way to get money invested without experiencing the regret that would occur if markets decline immediately after investing a lump sum,” says Haworth. “It elongates your investment period, so you don’t start at just one price point in the market.”

Regularly directing assets from cash into the target portfolio of equities and other holdings, for a period of six months to two years, may reduce the risk of a large portfolio setback in a brief period of time. “It’s an effective and efficient way to invest so you participate when the market environment is favorable,” says Haworth.

Rebalancing

Investors may wish to consider rebalancing their portfolios, depending on their investment objectives. Asset prices can move in different directions and at different speeds, and these return variations can cause your initial portfolio allocations to drift from your long-term strategy.

Fixed income portfolios may require attention if investors emphasized high-yielding, short-term debt securities up to now. “Prior to 2023, investors were dealing with interest rates that were still rising, a riskier environment for long-term bond investments,” says Haworth. “We appear to be at a point where short-term interest rates are near a peak. This may be a time for investors to direct cash-oriented investments into other long-term assets.”

Year-to-date performance of major asset classes as of May 20, 2024.
Sources: S&P 500/DJ All Equity REIT – S&P Dow Jones Indices; Bloomberg U.S. Aggregate Bond, Bloomberg Commodities Index – WSJ.com; U.S. 30-90 Day Treasury – Morningstar. As of May 20, 2024.

“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.”

“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,” says Rob Haworth, senior investment strategy director at U.S. Bank Wealth Management.

Notably, some growth-oriented S&P 500 sectors that were hard hit in 2022, such as communication services and technology, bounced back in 2023 and early 2024. 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 annual performance across a variety of asset classes (represented by market indices) for the past five years.

The table details annual performance across a variety of asset classes (represented by market indices) from 2019 to 2024 as of May 20, 2024.
Period ending 5/20/2024. Source: Morningstar. Past performance is no guarantee of future results. Returns shown represent results of market indexes and are not from actual investments and are shown for ILLUSTRATIVE PURPOSES ONLY.

Maintain a well-positioned portfolio

As you seek to properly position your portfolio, consider tactical adjustments to take advantage of specific opportunities that have emerged in today’s market. Use dollar-cost averaging to put money to work systematically over time and limit the potential downside risk of a large, lump-sum investment. In addition, 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 S&P 500 Index consists of 500 widely traded stocks that are considered to represent the performance of the U.S. stock market in general. The Russell Midcap Index measures the performance of the mid-cap segment of the U.S. equity universe and is a subset of the Russell 1000 Index. It includes approximately 800 of the smallest securities based on a combination of their market cap and current index membership. The Russell Midcap Growth Index measures the performance of the mid-cap growth segment of the U.S. equity universe. It includes those Russell Midcap Index companies with higher price-to-book ratios and higher forecasted growth values. The Russell Midcap Value Index measures the performance of the mid-cap value segment of the U.S. equity universe. It includes those Russell Midcap Index companies with lower price-to-book ratios and lower forecasted growth values. The Russell 2000 Index measures the performance of the 2,000 smallest companies in the Russell 3000 Index and is representative of the U.S. small capitalization securities market. The MSCI EAFE Index includes approximately 1,000 companies representing the stock markets of 21 countries in Europe, Australasia and the Far East (EAFE). The MSCI EAFE Value and Growth Indices covers the full range of developed, emerging and All Country MSCI Equity Indices. The MSCI Emerging Markets Index is designed to measure equity market performance in global emerging markets. The Dow Jones Equity All REIT Capped Index is designed to measure all equity REITs in the Dow Jones U.S. Total Stock Market Index, as defined by the S&P Dow Jones Indices REIT/RESI Industry Classification Hierarchy, that meet the minimum float market capitalization (FMC) and liquidity thresholds. The FTSE Global Core Infrastructure 50/50 Index and FTSE Developed Core Infrastructure 50/50 Index give participants an industry-defined interpretation of infrastructure and adjust the exposure to certain infrastructure sub-sectors. The constituent weights for these indexes are adjusted as part of the semi-annual review according to three broad industry sectors — 50% Utilities, 30% Transportation including capping of 7.5% for railroads/railways and a 20% mix of other sectors including pipelines, satellites and telecommunication towers. Company weights within each group are adjusted in proportion to their investable market capitalization. The Bloomberg U.S. Aggregate Bond Index is a broad-based benchmark that measures the investment grade, U.S. dollar denominated, fixed-rate taxable bond market, including Treasuries, government-related and corporate securities, mortgage-backed securities, asset-backed securities and commercial mortgage-backed securities. The Bloomberg U.S. Municipal Bond Index is a broad-based benchmark that measures the investment grade, U.S. dollar denominated, fixed tax-exempt bond market. The index includes state and local general obligation, revenue, insured and pre-refunded bonds. The ICE BofAML U.S. High Yield Index tracks the performance of U.S. dollar denominated below investment grade corporate debt publicly issued in the U.S. domestic market.

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