The ideal financial outcome for the next 18 months includes a soft landing for the economy, lower inflation and steadily declining interest rates.
Stocks could be expected to maintain their winning ways in this outlook, while bonds prosper as well. Balanced portfolios would rule.
Do not dismiss this vision of the future as fantasy. It could happen, and do we not deserve a year of quiet financial prosperity? Oh, wait. That was 2019. Since then, we’ve seen 4½ years of continuing disruption. Keep reading if you have any concerns that we are not done with financial surprises of the negative kind.
Investors tend to benignly neglect their portfolios at times like these, when returns are there for the taking. A simple portfolio of index-tracking exchange-traded funds weighted 60 per cent to stocks and 40 per cent to bonds could easily be up close to 10 per cent for the year to date. Amid this bounty, it’s time to take a serious look at what you own and how it would fare if market conditions deteriorated.
Some questions to answer:
How much exposure do I have to the S&P 500, Nasdaq or equity funds with similar holdings?
The recent plunge in the S&P 500 and Nasdaq highlights the risks posed by the fact that big tech stocks have been driving U.S. market returns. When these stocks lose momentum, the broader market follows. Consider paring U.S. exposure back to the original level set in your personalized asset mix.
How much exposure do I have to bonds?
Speaking of your asset mix, do you have the prescribed percentage of bonds right now? Weak bonds and strong stocks may have left you with a more equity-heavy portfolio than you intend. Consider adding money to bonds, which offer a buy low opportunity right now. If interest rates keep falling, expect bonds to rise in price.
What new and thus untested products do you own?
The investment industry rarely passes on an opportunity to help investors tap into trends of the moment using ETFs or mutual funds. The risk is that these trends fall out of favour, causing the funds that focus on them to lose lots of money. Very few trend- or sector-focused funds are long-term holds, so consider your exit strategy.
Do you own any investments that cannot be sold easily?
Some investment vehicles are set up in a way that gives the issuer discretion to limit or suspend redemptions. If you own anything that isn’t a publicly traded stock or ETF, or is not listed on the Fundserv system for mutual funds, it’s time to consider how committed you are to holding through potential volatility ahead. Another question: why hold a snowflake investment product that must be protected from investors in stressful times?