Sending Your Portfolio Back to School

DEWITT, Mich. - Sept. 15, 2015 - PRLog -- When kids go back to school this fall, how much knowledge have they lost over summer break? While the stats vary, it’s not just students who can relate to “summer learning loss.” Did you put important investment decisions on the back burner over the summer?

Now that school’s back in session for most of the country, it’s also a good time to send your investments back to school for a refresher. That way, you can be confident they’re up-to-date with any changes in your life – and ready for the future.

Keeping Up with Current Events

Are you concerned about how to sift through all the headlines about Greece, government debts, the Federal Reserve’s plan to start hiking interest rates or how much China’s economy is slowing? Fortunately, sending your portfolio back to school doesn’t require that you ace a current events quiz. Concentrate on the bigger picture, and make sure you’ve accounted for any changes in your life. We think the global economy is improving slowly, interest rates will increase modestly, and rising company earnings should support higher stock prices over time. That’s a pretty good setting for most investors.

It’s the Mix That Matters

A good lesson is to keep investing simple – own a wide variety of investments that perform differently from one another. In other words, diversify your portfolio. That way, it’s well-positioned for any of these current events – and others – that affect the markets. You may own investments that have recently disappointed and wonder whether diversification works. Staying diversified isn’t easy because investors tend to be least interested in owning out-of-favor investments, and those frequently perform better. Remember, an appropriate mix of investment types – also called your asset allocation – can help you stay prepared for, without trying to predict, what happens next.*

3 R’s for Your Portfolio: Review, Rebalance, Refresh

Stick to the following three R’s to help keep your investment strategy on track.

1.  Review You’re investing because you have important long-term financial goals. Reviewing them can help you address any changes. Just as the teacher tracks your success, your financial advisor can show your progress toward your goals. The rising stock market over the past six years produced above-average returns of 17.6% per year and may have increased your portfolio’s value. So you may need to reset your expectations about future investment returns. Lower stock returns historically have followed periods of above-average returns. We expect long-term U.S. stock returns to be about 6% to 8% annually. Also consider your comfort with risk: Can you stay invested through market volatility? After recent years, normal ups and downs could be hard to stomach. You can reduce those anxieties with an appropriate mix of stocks and bonds – and enough cash to cover current expenses as well as emergencies.

2.  Rebalance  It’s easy to neglect one of the most important investment rules: rebalancing your portfolio regularly. Rebalancing simply means selling investments that have done well, or “selling high,” and buying those with lower prices, or “buying low.” As the chart shows, when the market moves, it changes the value of your stocks, raising or lowering the percentage they make up in your portfolio and the amount of risk you’re taking. A portfolio designed to have 65% in stocks could now have as much as 79% in stocks if not rebalanced. As a result, it will swing up and down with the stock market more than desired. We don’t know when stocks will pull back, but history suggests more volatility is probably ahead. That’s why you should make sure your investment mix matches your risk tolerance and aligns with your financial goals. Consider adding bonds and selling stocks to rebalance, if needed.

3.  Refresh Going back to school means being exposed to new ideas – similarly, consider refreshing your portfolio by adding new investment types, if appropriate. Small- or mid-cap stocks, real estate and high-yield bond investments can help improve your portfolio’s diversification. And look for investments that have lagged behind over the past few years, including bonds and international developed-market stock investments. The types of investments that lead and lag usually change from year to year.

Get Back to the Basics

Taking your investments back to school is a way to stay focused on time-tested strategies for your portfolio. The three R’s of reviewing, rebalancing and refreshing your investment portfolio can keep you disciplined – and your financial advisor can help you track your progress toward achieving your goals over time.

Source: Ibbotson. Initial allocation of 65% in S&P 500 Total Return Index and 35% in BarCap Aggregate Bond Index, 1995–2014. The indexes are unmanaged and are not meant to depict an actual investment.

*Diversification does not guarantee a profit or protect against loss.