- Consider tactical positioning, which involves making modest, temporary asset allocation 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 limit the magnitude of investor regret 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 overall portfolio risk.
Challenging investment performance has been a 2022 hallmark, with investors experiencing losses across most major asset classes. In the past, bond market returns have provided a positive performance offset during periods of stock market declines. However, high inflation, rising interest rates, a European conflict and the ongoing coronavirus pandemic have all contributed to downward pressure on both bond and stock prices. Only a few, narrow slices of the capital market landscape have provided any respite from price pressures, such as the volatile energy complex and very short-maturity fixed income investments, like money market funds. (See the table on page 2 for a summary of year-to-date asset class performance).
Such challenging market performance periods lead investors to question what to do to align your portfolio toward your long-term investment plans and goals. We suggest three situational tactics to consider in the current market environment: Tactical positioning, dollar cost averaging and rebalancing.
Tactical positioning involves making modest, temporary asset allocation adjustments within your investment portfolio relative to your long-term target allocation. These adjustments reflect our current assessment of capital market trends and relative risk and return opportunities among asset classes. For our latest thinking contact your wealth management advisor or visit Market News on usbank.com.
Investors often accumulate cash in their portfolios through interest, dividends, or perhaps through security or business sales proceeds. Investing cash into higher-returning asset classes in the long-term is critical in meeting long-term financial goals. However, challenging markets often leave investors uncertain regarding timing of investing cash into their long-term plan. One strategy to consider is dollar cost averaging.1 This involves investing a portion of the cash balance into the target portfolio through regular intervals rather than trying to invest the cash all at once (a practice called lump sum investing). Our research showed that lump sum investing produced the highest average historical returns; however, investors may experience regret if markets slip further. In this case, making regular transitions from cash into the target portfolio, over as many as two years if starting from an all-cash position, may limit the magnitude of investor regret, which we define as the average number of months the portfolio spends below its initial value.
Lastly, investors should consider regularly rebalancing2 their portfolio. Asset prices can move in different directions and at different speeds, and these return variations can move your portfolio allocations away from your long-term strategy. Recent market volatility likely means many portfolios are misaligned with long-term goals, especially as some key asset classes have experienced performance differences of more than 10%. The table below details performance across a variety of market indexes through August 31, 2022. Our analysis finds periodic 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 overall portfolio risk. We first suggest evaluating your relative stock/bond allocation and using the recent significant 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.
|Asset Class||Total Return (%)|
|Bloomberg U.S. Aggregate Bond||-14.61||-1.54||7.49||8.72|
|Bloomberg Municipal Bond||-12.13||1.52||5.20||7.54|
|ICE BofA U.S. high yield||-14.62||5.37||6.15||14.42|
|U.S. Treasury 90 day T-Bill||1.01||0.04||0.36||2.06|
|Russell Mid Cap Index||-24.27||22.60||17.06||30.57|
|Russell Midcap Growth Index||-31.45||12.74||35.50||35.50|
|Russell Midcap Value Index||-20.36||28.36||4.95||27.08|
|Russell 2000 Index||-25.10||14.83||19.92||25.54|
|MSCI EAFE Index||-26.76||11.78||8.26||22.67|
|MSCI EAFE Growth Index||-32.82||11.59||18.64||28.46|
|MSCI EAFE Value Index||-20.61||11.59||-2.10||16.84|
|MSCI Emerging Market Index||-26.89||-2.22||18.65||18.91|
|DJ Equity All REIT Index||-28.06||41.34||-4.07||28.69|
|FTSE Global Core Infrastructure||-13.29||17.86||-0.66||26.28|
This year’s turbulent market performance disrupted some long-term investment plans and portfolios following strong recent year returns. With major asset classes delivering disappointing performance, investors may ask what to do next. We offer three potential solutions depending upon your specific circumstances. First, consider a tactical adjustment to align your portfolio with current market concerns and risks, contact your advisor for our latest thinking.
Second, if you find your portfolio holds excess cash, consider a dollar-cost averaging plan to start investing cash and fully invest your portfolio in the next year or two. Third, diverging asset class performance opens the opportunity for rebalancing. We suggest bringing your stock and bond mix back toward your target allocation and examining allocations within asset classes, such as mid-cap U.S. stocks or developed foreign stocks, to bring divergent investments closer to long-term target allocations. Your wealth management advisor can be instructive in blending and selecting strategies to keep your portfolio on target for your long-term investment plans and goals through this challenging market environment.
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