Summer 2021 Quarterly Newsletter
Author: Denis Curcio, CFP®
When I tell people my daughter is a competitive rock climber, I’m usually met with a, “Wow! That sounds dangerous and risky.” I usually nod and smile, knowing that driving the car to go climbing is statistically about the same level of risk. What I have learned over many years of working with clients (and what research has confirmed)is that humans are bad at calculating risk especially when strong positive or negative emotions are present.
As I write this article, all three major indexes (S&P 500, Dow Jones and NASDAQ) have reached all-time highs. Is the market riskier now at all-time highs or are we miscalculating the risk because of the negative emotions experienced during previous market downturns? Obviously, we cannot predict the markets direction in the short term, but we can take steps to control risk by way of some basic investment management principles. Here are a few things you should be discussing with your advisor now instead of during volatile times when emotions can get in the way.
Above all else your portfolio allocation will determine the level of risk and return you experience. Review your current allocation with your advisor in relation to your financial goals and make sure they are aware of near-term spending needs. As a result of strong market returns, it is possible your equity allocation has increased and now could be an opportune time to re- balance. Or perhaps you have accumulated additional funds from decreased spending during the pandemic and you have a lower cash need for the remainder of the year. It is always better to check your allocation when things are good than having to make a quick decision at an inopportune time.
Once you are comfortable with your allocation, make sure your assets are diversified. If we are managing your assets, diversification is likely not an issue. However, maybe you have a concentrated stock position you cannot seem to let go of or perhaps you have an asset we do not know about. Investors tend to want more of a good thing, which can lead to concentration risk when chasing returns in hot sectors or a particular company’s stock. The best way to know if you are diversified is if something in your portfolio seems to be under-performing.
The strategies of proper allocation and diversification are easy until volatility hits as it did last year and we enter a period of uncertainties and unknowns. At these junctures we need to be more disciplined than ever. Rebalancing during a downturn essentially means buying stocks when the conditions for doing so look terrible. Again, I encourage you to discuss your current portfolio with your advisor so you are prepared the next time volatility strikes.
This article was featured in our Summer 2021 Quarterly Newsletter available here:Quarterly Newsletter