Check in on these five things now?
Over the last four weeks we’ve experienced a mini stock market crash of almost 8 percent. Although 8 percent is not considered “correction” territory, many investors found themselves feeling anxious about the future. Luckily the rebound has been astronomical and not only have we recovered the 8 percent, but the stock market has gone on to set all time new highs. The S&P 500 is currently above 2030, an increase of about 10 percent this year. If these highs and lows or “volatility” continues, and all arguments point to the fact that it could, does it now make sense to take advantage of these times and make changes to your investments? Take a look at these five suggestions to see if they have merit for your qualified and tax deferred plans.
1. Rebalance your portfolio. If you’ve been reading Paula Cashflow blogs, you already know that rebalancing your portfolio is an important investing behavior. Why is now a good time? With all-time highs in the stock market, your asset allocation may be in need of tweaking. For example, a moderate portfolio is considered to be about 60 percent stocks and 40 percent bonds/cash (aka 60/40 split). As the stock market goes up, stock valuations increase relative to bond valuations. Translation: your allocation may now be more like 65/35 or a 65 percent allocation to stocks and a 35 percent allocation to bonds. This is a slight exaggeration to make my point. A 65/35 allocation is riskier than a 60/40 split. By rebalancing now, you sell 5 percent of your stock holdings at the higher price and reinvest those dollars in either bonds or cash to rebalance back down to a moderate mix of stocks and bonds or cash.
Paula Cashflow tip: The challenge here becomes “does selling stocks mean buying more bonds?” If so, then focus on bond duration. Read on.
2. Consider lower duration bonds. If you don’t know anything about bond duration and you currently hold bonds, then do a little research on Google and learn as much as you can. Owning bonds right now is all about managing the duration in my opinion. I’ve been scaling down my duration over the last three years lowering it from about six years down to below four years. Basically, what duration means, is that bond prices are inversely correlated with interest rates. So when interest rates rise (and all indications are that interest rates will begin to rise in the near term), bond prices will fall. In concept, bonds with lower durations will fall less than intermediate or longer term bonds that have higher durations.
Paula Cashflow tip: Focus on investment grade bonds/bond funds. High yields and emerging market bonds can be directly correlated with stocks.
3. Take advantage of index funds when making changes. Does the opportunity to consolidate into an index fund make sense at this time? Index funds are far less costly than non-index funds or what could be called “actively” managed funds. Now might be a good time to increase your knowledge about the fees that each fund in your portfolio is charging.
Paula Cashflow Tip: Benchmark the fees against the same fund at either Vanguard or Fidelity to compare what you’re paying with these lower cost options.
4. Pay attention to the cash portion of your asset allocation. We are living in a low interest rate environment and will be for some time. Don’t ignore the importance of having cash in your portfolio just because the available options aren’t yielding much in return. This is one fundamental that probably should not be abandoned.
Paula Cashflow tip: Stocks and bonds should be augmented with a small portion of cash or short term investment grade bonds. I’m not talking about cash allocated to an Emergency Fund.
5. Run the numbers to see if you’re on track to achieve your goals. The final exercise should always be about checking to see if you’re on track to achieve the goals you’ve set. There are numerous retirement calculators available online. I use the old fashioned one, Excel to see if my chosen asset allocation is on track.
Paula Cashflow tip: Make sure that this exercise includes both tax deferred and non-qualified assets as well.
Who knows what awaits us next week in the stock/bond markets. Every day on CNBC there are money managers that take opposite sides on the directions of all of our markets. All we can do is get comfortable with our risk tolerance and engage in the behaviors that protect our investments and allow us to sleep at night when the direction moves against us.
What more can we do? Because it’s about life and how you live it.
In the spirit of financial well-being,