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Why You Should Be Retuning Your Stock Portfolio
In the middle of March, when market volatility was peaking, you may have promised that when the markets recovered, you were going to make a change. Well, many markets have recovered from their March lows, so now what do you do?
In case you needed a reminder, the Dow Jones Industrial Average, known for its blue-chip companies, fell 1,861.82 points last Thursday, June 11. This marks the fourth-largest point loss in the history of the index.
General discussions about the stock market often mention historically bad events such as Black Monday and the Great Recession. Often, it is the pace of the losses that leaves a lasting impression, but this fails to tell the whole story.
On Black Monday – Oct. 19, 1987 – the S&P 500 fell by 20.46%. That said, the index would still produce a gain of 3.4% for the year. More recently, in 2018, when the S&P 500 fell by 25% in the fourth quarter, it only fell by 6.24% for the entire year.
As we near the halfway point of 2020, it is to be seen whether the 34% correction in the S&P 500 from the February highs represents another year that will be remembered more for the correction than the actual performance for the year.
Here are a few things you need to know when it comes to balancing your stock portfolio amid the current volatility.
Account Alignment
An account should be associated with a goal. Having just one account for all your goals may be tax-inefficient. Tax treatment for brokerage accounts is different than tax treatment on retirement and college savings accounts. Understanding the difference in tax treatments may help you save a lot of money.
All transactions in brokerage accounts are subject to capital gains treatment. Exposing every trade to either short-term or long-term capital gains will act as a weight when you’re trying to grow your brokerage account balances.
Retirement account contributions, such as with a 401(k), normally have the advantage of not paying taxes until monies are withdrawn during retirement. Presumably, one’s income tax rate will be lower during retirement than when working, which provides the advantage.
Risk Tolerance
Not looking at your account statement is not a form of understanding your risk tolerance.
Identify how much risk you are comfortable accepting for each goal you have. It is understandable if anyone was worried about the stock market in March, as the S&P 500 fell 34% to a low of 2,237.40 on March 23. Still, If the last few months caused you to worry about your investments, then you may not be properly allocated.
The overall objective is to achieve your goals, not to try and time the markets. Trillions of dollars were moved out of the markets this March at exactly the wrong time. Aligning your investments with your risk tolerance level may help you stay invested today and in the future.
Time Frame
The shorter your time frame, the more you are going to look at your account balance.
If the goal is education funding for a tuition bill that is due within 90 days, you may not want your portfolio to be exposed to further market whipsaws. The longer the time frame to achieve a goal, chances are, the less worried you can be about daily market gyrations.
Rebalance
Is your portfolio structured for today’s economy, or does it reflect one from years ago? The most valuable companies are constantly changing, which is the nature of company life cycles. In 2001, the most valuable publicly traded company was GE (ticker: GE). In 2018, the DJIA removed GE, one of its original members, and added Walgreens (WBA) to reflect the change in its index.
Of course, many of today’s most valuable companies were not even available that long ago. Facebook (FB) and Twitter (TWTR) became available in 2013, while Tesla (TSLA) started publicly trading back in 2010.
Amazon (AMZN) opened for public trading in 1997 and traded above $100 in less than two years. Most would not fully grasp the potential of Amazon, as you could have purchased it for less than $6 per share in 2001.
Diversify, Diversify, Diversify
You cannot be expected to know which company will become the next global leader, but you can diversify so that you are exposed to industries on the rise. Having a diversified portfolio of exchange-traded funds or mutual funds can be a great way to gain exposure to many sectors around the globe.
Tax-Loss Harvesting
The IRS allows $3,000 of capital losses, or $1,500 if married and filing a separate return, to be used as a deduction to your income taxes each year. If you own stocks that have failed to keep pace with the general market, this may be an opportunity to reposition your portfolio and reduce your tax bill.
Add Protection
Has your financial advisor been bugging you about protection policies such as long-term care? For individuals who are nearing retirement and saw their account balances swing from $1 million to $750,000 and back, for example, this may be the time to reconsider those protection discussions.
For many, the biggest expenditure during retirement will be costs related to health care. Having a long-term care policy in place can help ease those concerns.
Takeaway
Take advantage of the market rebound to fine-tune your portfolios. History shows that a stock market correction of 10% or more occurs about every nine quarters. Given the many health and economic uncertainties, there remains a fair chance that another market correction could happen before the historical averages suggest.
Now may be the time to align your accounts with specific goals, as you promised that you were going to do, to help you achieve your goals.
