Retooling Your Investment Portfolio Amidst The Turmoil The smartest investor


This year has started on a positive note for most investors; 2019 provided exceptional returns for almost all asset classes and at the start of the year it looked like these gains would continue. But we all know what happened next. An extremely fast and deep bear market, widespread business closures and record unemployment have hurt the economy.

Yet in a short period of time, the markets have risen as vigorously as they have fallen. Remember that the markets are forward looking because prices are based on expected future earnings. In the midst of this turmoil, investors experienced a real test of their true tolerance for risk. Some have tried to “reduce the risk” of their wallets and others have jumped at the opportunity to buy at a discount.

You’ve probably learned something about yourself as an investor recently. Here are some key areas of your financial life to consider in a new light.

Examine your risk profile

Maybe when you first created your portfolio allocation, your financial advisor or online robo-advisor had you fill out a risk profile questionnaire. Most investors know the “right” answers to these quizzes. You’re not supposed to panic and sell when the markets are down, so you probably answered that way. However, you have just taken the real life test to find out if you are being honest with yourself.

As the markets collapsed, did you feel extremely stressed about your portfolio allocation? Did it drop more than expected? Have you considered selling during the lows? If so, your overall allocation may be more aggressive than it should be for your particular risk tolerance.

Perhaps you have experienced the opposite. Has the market decline made you regret being in a good position to take advantage of the lows? Would you like to participate more in stock market movements? If so, review your allocation and determine if you should allocate more to stocks.

There are many other factors that determine your broad asset allocation. For example, when should you use the money? Young investors can “afford” more risk because they have more time to recover from a loss. Likewise, if you are a grandparent with an account for your young grandchildren, they probably won’t need this money for a long time, so it would be beneficial to take a bit more risk for longer rewards. term. As a general rule, the money you need in the short term, which is usually within three years, should be invested in a more conservative and income-oriented manner.

Consider your holdings

Managers of mutual funds and exchange-traded funds underwent a downside risk management test in February and March. An equally important test took place in April and May when the markets soared. Now is a great time to take a look at how your funds have held up against their target benchmark and against their peers in both situations. Did your funds participate in the losses and gains to the extent that you anticipated?

This is also a great time to take a look at how your mutual funds and ETFs fit into your overall portfolio strategy. Are your funds tax-efficient? Do your funds have high expense ratios or are you overexposed to any asset class or industry?

Volatile markets also offer rebalancing opportunities. After those wild peaks and troughs, your portfolio allocation may be totally out of step with what you planned. Examine and rebalance if necessary.

Review your emergency reserve fund

The shutdown caused problems in the markets, but also in the economy and employment at large. Many investors have faced a double whammy of disruption or loss of employment income as their investments in stocks and bonds collapsed. The decline in bond markets was temporary and has since been addressed in several ways by the Federal Reserve’s statements of support. However, if you did not have sufficient cash reserves and had to dip into your low stock or bond investments, you would have seriously hampered your returns.

It can be a painful lesson to learn, but if you find that your emergency fund was running low during the time you needed it most, try to improve those numbers as soon as possible. Keeping at least three months of your basic expenses in an emergency fund is usually the “standard” minimum amount, but you may need more.

Take a look at your debt portfolio

One of the results of the economic damage caused by the recent slowdown is that interest rates are now at historically low levels, close to 0%, and the Fed is committed to keeping rates low for a while. This in turn affects US Treasuries and the entire bond market. If you have a mortgage, this might be a good time to consider refinancing prudent. You can also use this time to restructure other types of debt, especially high interest or variable debt.

Take a look at your cash flow

For many, the commands to “stay at home” had a silver lining. With nowhere to go, spending on entertainment and dining has plummeted. Now that the reopening has begun, think carefully about what costs you want to restore. You could significantly increase your ability to save and put yourself in a stronger financial position for the future.

Buy things

This may seem counterintuitive compared to the previous point. However, if there are any items that you had considered before, you might find them on sale now. As businesses reopen, many are offering specials and discounts to attract buyers. If your cash flow can handle it, get a good deal.

Learn from experience

We have all been affected by this global pandemic and we can all learn from it. Get something positive out of this difficult situation, like saving more or changing your approach to investing. Use this experience to determine the steps you can take to improve your net worth over time.


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