“The stock market came back a long way in 2023,” 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. In the current environment, U.S. Bank recommends a neutral portfolio that includes an appropriate mix of:
- Fixed income. Bond investors may be able to capitalize on today’s much more competitive yield environment. Interest rates are significantly higher today than they were prior to 2022. Although rates could move higher from current levels, today’s more attractive yields create solid potential for fixed income investors.
- Equities. Market sentiment mostly remains positive at the start of 2024. While investors should be prepared for some ups and downs, the steadiness of the U.S. economy has been supportive of equity markets.
- Real assets. There are specific opportunities to incorporate real assets (such as real estate investment trusts or REITs) to help balance a portfolio predominantly made up of stocks and bonds.
“This is a time when investors should consider a neutral weighting across these major asset classes,” says Haworth. “That’s an important step to take before you consider tactical adjustments.” Haworth recommends that more risk-sensitive investors may want to explore opportunities to expand bond holdings given today’s elevated interest rate environment. “For some investors, it’s worth taking a closer look at your stock and bond asset mix, because bonds may be able to generate enough yield to allow you to trim your equity position, which can reduce portfolio risk in the long-term.”
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:
- Equity investors may want to tilt portfolios slightly toward U.S. stocks over foreign stocks and modestly boost positions in mid-cap stocks (shares of medium-sized companies).
- Fixed-income investors may want to consider non-government agency-sponsored residential mortgage-backed securities, which can benefit from today’s higher interest rate environment.
- Insurance-linked securities, tied to the sale of reinsurance products, can offer highly competitive income streams in the current environment for certain types of investors, particularly within trust portfolios.
- Tax-aware investors can earn extra potential returns from 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.
Investors can accumulate cash in their portfolios through interest, dividends, or through security or business sales proceeds. Some investors may still have left cash “on the sidelines” following 2022’s challenging capital markets environment. 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.