Ways to Strengthen a Portfolio in Unpredictable Markets
1. Regular stress testing
Portfolio stress testing ensures portfolios can adapt to various conditions without breaking, demonstrating how long-term plans could be impacted across different market situations. Investors should consider how much of a swing in value their current equity exposures would experience in a downturn, and whether that can be tolerated.
There’s much to be gained from regular proactive portfolio management. Additionally, last year’s gains give investors the opportunity to strategically reassess from a position of strength.
2. Rebalancing
Portfolios that were diversified a year ago may no longer be adequately diversified, prompting a reassessment of their current diversification status. A 60/40 stock-bond portfolio, if left unchanged since 2014, has likely shifted to a 76/24 mix today.
This shift could have significant consequences; in a downturn, the portfolio’s imbalanced allocation might lead to substantially magnified losses.
We regularly review portfolios for rebalancing potential so that the overall asset allocation continues to match risk tolerances and keeps investors on track toward their goals.
3. Diversification
Start with stock-bond diversification – a resilience fundamental that spreads risk because different asset classes tend to react to events differently, typically reducing portfolio volatility. But diversification goes one better, asking: Is there diversification within the stocks and bonds?
Is there international equity exposure, for example? What about dividend-paying equities? Different return drivers, across asset types and regions, can help manage volatility and potentially help in preserving capital
4. Optimizing your tax efficiency
After strong equity returns in 2023 and 2024, investors are most likely sitting on significant gains, which means a big tax bill once those gains are realized. Being tax smart matters now more than ever, and rocky markets are…
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