After a strong year like 2019, investors are thinking the good times will continue rolling as we head into 2020. And why wouldn’t they think that after the Fed announced no changes to its monetary policy, the economy is creating jobs, wages are rising, corporate profits are healthy, and the American consumer is optimistic and continues spending.
With the Dow Jones Industrials, S & P 500 and NASDAQ indices all hitting all-time highs, investors are getting excited about the new year’s prospects. If this current bull market makes it through another year, then it would be the longest on record, surpassing the 1987 to year 2000 bull market.
Apparently, this good news is not strong enough to hold back the market bears who believe after ten years, markets are due to correct, or worse, run into a bear market, which is defined as a 20% market decline. We were nearly attacked by the bear about a year ago. Bull markets do not last forever, and we know market corrections and bear markets happen periodically. For that reason, it is a good idea to not be surprised when they occur as they eventually do.
Trying to predict when market corrections occur is a fool’s game despite the media attention they garner from financial folks. Instead of trying to make predictions, it would be wise for investors to consider the following strategy heading into 2020 & a new decade:
Rebalance Your Portfolio
After a strong year it is a good idea to review your portfolio and assess whether you need to make allocation adjustments. You do not want to take more market risk than warranted or desired. If you have not rebalanced all year, then you might have too much exposure to stocks than you realize and trimming them back may make sense. Rebalancing is always difficult when markets are climbing. But it ensures you conform to the ever important buying low and selling high mantra. It is far easier to rebalance if you have an asset allocation game plan already in place. You don’t want the market to dictate your allocation strategy.
Tax Caveat: Periodic rebalancing may result in realizing capital gains and losses in taxable accounts, so it is more important to consider them before you rebalance. If you can rebalance in non-taxable accounts (IRAs, 401ks, Roths, etc.), this might be a way to avoid realizing gains, unless you can realize your losses to offset those gains. It may be best to consult with your tax professional or financial advisor if you have concerns.
Beware of U.S. Bias
Most investors are overweight to U.S. stocks in their portfolios. This is common given that we all succumb to country bias, and there is no country worth being bias for than good ole USA! Our US markets have experienced a substantial rise this past decade and to think it will continue undiminished is probably wrong. This has been a long cycle of U.S. outperformance so the chances of it continuing are most likely low. Our investment team expects to see improved performance from foreign markets once the trade issues settle and the U.K. finally strikes a deal with the European Union. Both issues have negatively impacted foreign markets the past five years. Equity prices tend to change abruptly and what seems like a no-brainer for U.S. stocks continuing their run, might not occur. Therefore, if you have stayed away from foreign stocks because of the above, you might want to review your country breakdown and make changes.
This is a good time to prune your portfolio and remove investments that no longer meet your objectives. One of the most important parts of portfolio management is establishing your strategy or asset allocation. Once that is determined, it is important to select the right investments. If you use actively managed mutual funds like my firm uses for client portfolios, then you may need to assess management or the management team to see if the fund is still viable. This is a much more challenging process than looking purely at performance and often requires the advice of an experienced professional.
Ignore the Prognosticators
A new year always brings out what I call the “Crystal Ball” market folk! They are everywhere these days, and social media does not help! I’m already starting to hear or see them make predictions about the market, about what the Fed does, about Brexit’s success or failure, about the China trade deal, etc. Unfortunately, people enjoy hearing them! They make for good TV, but predictions are useless. It mostly brings attention to the individual.
Avoid Mixing Politics with Investing
Mixing your political views with investing is akin to drinking and driving. We know drinking and driving can lead to awful outcomes. The same can be said of politics and investing. If you let your personal political views enter your investment strategy, then you might get too conservative or aggressive than your goals may dictate. There are actions government can take to influence economy. However, it is important to keep in mind that regardless of what party controls government, markets are going to respond to primarily two core elements: the health of the economy and corporate profits. Those two aspects of the market will give us an idea of how the market performs over the long-term. We have seen markets perform well under both parties for many years. The political angle generally makes for good media coverage but try not to take it too seriously.
To sum up, as we embark on a new year, you must remember there is no “perfect” portfolio strategy. Your strategy should match your personal goals and objectives, and if that means having less in stocks and more in bonds, or vice versa, then so be it. It is far more effective to have control over your own destiny than to have the market control it for you.
If you do not have an idea of where you stand or need the guidance of an experienced team, then it may make sense to reach out to a professional like Bloom Asset Management for a review.