New Market Highs & Your Portfolio

Nov 2017

I recently received an email from a client who wanted to know whether in light of markets making new highs, our firm’s investment team was going to be making any changes to his portfolio. He specifically wanted to know if we thought increasing risk was the right move now or if reducing risk was the correct strategy. These are not uncommon questions. There is always a temptation during rising equity markets like we are experiencing now, for investors to question their carefully thought-out investment plan. Is my portfolio keeping up with the averages? What happens if the market reverses course and declines? Why am I up only 10% while the market is up 15%?

If you have a globally diversified portfolio that includes bonds, then comparing it to an all-equity index like the Dow Jones or S & P 500 Index is going to make it seem like you are missing out on higher returns, especially in a strong equity environment like this year. As of this writing, the S & P 500 Index is up around 17% YTD, while foreign equity markets (as indicated by the MSCI All-Country World IMI Index Ex U.S.) are up by nearly 21%! In contrast, the bond market (as exhibited by the Bloomberg Barclays US Aggregate Bond Index) is up only 3.3% YTD. It is normal for investors to question the performance of their portfolios, but comparing their diversified portfolios to that of an equity market index is not a fair comparison. Portfolios that contain exposure to bonds or other stable types of securities will generally not keep pace with equity markets when equities are rising because by their nature bonds are more conservative than equities.

Managing portfolio volatility through a disciplined asset allocation strategy tends to be underappreciated (or forgotten) when times are good, but we know good times don’t last forever. As much as we want to participate on the upside of any market advance, we know there are periods when markets reverse course, and tend to do so unexpectedly. The clear advantage of a well-diversified portfolio is its ability to help investors stay invested during the turbulent times, as part of the portfolio will decline less or not decline while stocks drop. Of course, this is easier said than done and investors have to accept that markets suffer periodic declines even during up years as the chart below shows. As an example, in 2016, the S & P 500 Index suffered a big decline (dropping 14%!) earlier in the year, but then rallied higher to finish positive for the year.

Adhering to a well-thought out investment strategy specifically designed for that individual is how successful investors navigate through market volatility and unexpected wind shears.

My advice to the client was clear-cut: I found no reason for him to try and capture even higher returns by increasing his risk level at a time when markets have not suffered through a significant decline for several years.

In addition, I didn’t see the value in reducing his volatility since the portfolio’s current allocation was sufficient to meeting his goals.

Sometimes staying the course is the best strategy…….


Every investor’s situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment. The information provided above is generic and in no way represents what other investors should do with their own portfolio.  Any decision an investor makes should be based upon his or her own goals and objectives.   Investing involves risk and investors may incur a profit or a loss. Please consult with your financial advisor about your individual situation.

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