Fine-tune your investments for continuing inflation — and slower growth
Consider these 6 steps to help you stay on track to meet your goals in today’s choppy markets
“As you adjust, look for opportunities to reinvest the proceeds in attractively priced assets that have temporarily lost value.”
FOR INVESTORS, TODAY’S MARKET ENVIRONMENT may feel like the definition of unpredictability. “We’re experiencing a lot of change in the economy and our world, and that’s creating sometimes heightened market volatility,” says Chris Hyzy, Chief Investment Officer, Merrill and Bank of America Private Bank. During this “very choppy, push-pull type of market,” as Hyzy calls it, investors may risk making rash decisions in response to the latest news cycle. A better approach: stick to the fundamentals, like diversification, rebalancing and staying focused on your goals.
That doesn’t mean do nothing, says Joseph Curtin, head of CIO Portfolio Management for the Chief Investment Office (CIO), Merrill and Bank of America Private Bank. “Given the background of inflation, slower growth, shifting monetary policy and rising interest rates, we think investors should look at ways to reposition their portfolios for 2023 and beyond.”
These six steps could help you keep your assets properly diversified and aligned to meet your long-term objectives.
1. Revisit your investment goals. If it’s been a while since you’ve reviewed your portfolio, start by thinking about your personal goals and whether they’ve changed since your last review, Curtin suggests. “Once you’ve updated your goals, make sure your asset allocation strategy aligns well with them,” he adds. Those with a shorter time horizon — imminent retirement, for example, or plans to purchase a second home in the near future — may call for more conservative investments. While that’s true at any point in time, sudden changes in the market could drive down the value of riskier investments right when you need those funds most.
2. Look for opportunities as you rebalance. Especially during times of volatility, your carefully selected asset allocations will shift as some investments outperform others, potentially making your portfolio more aggressive or conservative than you desire. Periodic rebalancing — selling some assets that have performed well — is essential to staying properly diversified. “As you adjust, look for opportunities to reinvest the proceeds in attractively priced assets that have temporarily lost value,” Curtin suggests.
3. Evaluate concentrated positions. “If you have outsized, concentrated holdings in a specific company or asset class, carefully examine whether they still make sense for you,” Curtin suggests. Concentrated positions add risk. Those risks may be less pronounced when assets are performing well. Volatile markets, in contrast, underscore the importance of staying diversified, so that a drop in any specific investment doesn’t unduly harm your portfolio. Unless they offer clear benefits, “reducing concentrated holdings could give you greater diversification to withstand unpredictable markets,” Curtin says.
“Reducing concentrated holdings could give you greater diversification to withstand unpredictable markets.”
4. Consider active investing. Passive investing — a kind of set-it-and-forget-it strategy that minimizes buying and selling of assets — has grown in popularity in recent years. Exchange traded funds (ETFs), for instance, which seek to replicate the returns of broad indexes, are a common form of passive investing, and they perform well during surging markets. “At a time of slower growth and greater volatility, however, passive investing may become less effective,” Curtin says. Active investing involves funds whose managers use their experience to select assets that may outperform indexes. While there are no guarantees that active investing will generate specific returns or outperform passive investing, these skills come to the fore when markets overall are growing more slowly, Curtin says. “This may be a time when active managers can add meaningful value to portfolios and complement passive investing.”
5. Review your bond holdings. “Many yield-generating investments — including long-dated bonds, Treasury and agency securities (bonds issued by government agencies or government-sponsored entities, such as Freddie Mac and Fannie Mae), as well as certain real estate investment trusts (REITs) — can be particularly sensitive to rising interest rates,” Curtin says. Because rising rates can lower the value of bonds currently in your portfolio, “We suggest holding bonds with a lower duration,” Hyzy adds, “and consider other investments, including high-quality stocks that pay dividends, to supplement bond income.”
6. Invest tax-efficiently. To mitigate taxes, consider holding less tax-efficient investments in tax-advantaged accounts and more tax-efficient investments in taxable accounts, Curtin suggests. And if volatility drives down the value of some investments you’d like to sell, “harvesting” those losses in your taxable accounts this year could help offset taxable capital gains from investments that have performed well.
As you consider these steps, keep in mind that short-term buying and selling in anticipation of market swings isn’t among them, Hyzy notes. Many studies confirm that attempts to “time” the markets by getting in and out usually fail, and that missing even a handful of the best market days could have serious consequences on your overall returns. “The best approach is to stay invested in a portfolio that’s diversified across and within asset classes,” Hyzy says. And be sure that any adjustments you make fit your long-term goals. “Ask your advisor which steps might be appropriate for your situation.”