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Portfolio Check-Up Considerations for 2020



Portfolio check-up considerations for 2020
The fastest stock market decline in history, city wide lock-downs, social distancing, record U.S. unemployment, massive economic stimulus, widespread civil protests — the year is only half over and already it’s one for the records. Whether you believe the worst is past or you’re waiting for the other shoe to drop, even the most diligent may be wondering what’s going to happen next, and what, if anything to do about it. We recommend considering these portfolio check-ups given the current environment.

Is your asset allocation in-line with your goals and the amount of risk you wish to take?
You should confirm that your asset allocation is right for the amount of risk you are willing to take. The asset allocation is simply the percentage of your portfolio you invest in stocks or growth investments versus bonds and other conservative investments. Stocks are intended to provide long-term growth, but typically only when they are owned long-term. Conversely, bonds and other conservative investments aim to provide stability and act as ballasts against swings in the market, while ideally generating some income all the while. The less risk you wish to take or the shorter the time frame you have, the less money you should have invested in stocks, which may be subject to short-term swings. Whether you’re nervous about the markets, or somewhere in the middle, it’s important to adjust your asset allocation to a level where you can meet your goals but sleep well at night.

Diversification, diversification, diversification – Do you have enough?
There is safety in numbers. It’s important to be diversified in your investments, and to not put all of your proverbial eggs in one basket or even a few baskets. Spreading your risk among different asset classes, industries, risk types and even by country can help you avoid pitfalls among a limited number of investments. We view diversification as “the only free lunch in town” and a critical tool to help increase investment returns and at the same time reduce risk.

Market volatility is likely to persist in the near-term as the world races to develop a COVID vaccine. As such, increasing your portfolio’s diversification, such as spreading your investments among a larger pool of securities or taking a more flexible global approach is appropriate in our opinion.

Stick to the plan
It’s important to have a plan in place and stick to it in times of market stress. We recommend that all our clients have a financial plan that is designed to protect and grow their money in line with their goals. That doesn’t mean don’t adjust the plan to account for the most recent change circumstances such as cash flow needs, change in employment status, change in retirement date, or change in risk tolerance. However, it is important to view your goals and investments with a long-term time horizon and not make decisions based on what may happen in a couple months or a year.

Shouldn’t we hedge our portfolio to protect it against another drop?
With the markets setting records for the fastest decent and conversely a quick recovery many are asking, “Shouldn’t we hedge our portfolio to protect it against another drop?” Hedging involves using derivatives such as options to buy insurance in case of a fall in the markets. On its surface it sounds like a good idea, right? Not so much. It doesn’t always work the way it was intended, the fees to do so are high, and it is not tax efficient. When hedging you must select the correct index to hedge, select the right price-level to hedge at, the correct time period to hedge, and the amount of your portfolio you want protected. That is a lot of variables to get right and it costs money to implement.

We find that a more successful way to protect portfolios from drops in the market is to simply adjust the asset allocation to be more conservative. “Don’t want your stocks to drop much? Don’t own as much dollars in them.” Historically, the temptation to implement complex investment strategies is highest when the market is volatile.