Rebalancing Your Portfolio After The Rebound
Over the short term, financials are also expected to benefit from increased business loan demand, merger and acquisition activity, and the continued wide interest rate spread, says Jason Polit, a portfolio manager with Charles Schwab, which upped the sector to “marketperform” from “underperform.”
And while the firm acknowledges the challenges facing utilities, it notes that sector too remains “somewhat attractive” as investors search for areas of the market that pay a bit more in dividends.
“We’re still bullish on the U.S., particularly large cap stocks,” says Olsen. “There’s a very accommodative Fed policy right now for larger companies. Interest rates are low and able to really drive bottom line profits and earnings expectations, and we think that’s going to continue” for the near term.
Europe, particularly Spain, Portugal, Italy and Ireland, merits caution, he says; Germany is still “absolutely” on his investment radar screen.
For the non-equity portion of its balanced growth portfolio, Polit says the remaining 30 percent should be allocated to bonds, 5 percent to cash, and 11 percent to alternative investments like real estate investment trusts, commodities and equity-market neutral strategies in which the hedge manager goes both long and short on stocks in the same sector or industry.
For tactical investors, commodities have been hard to ignore, posting some impressive gains over the last year, led by oil and gold.
The Goldman Sachs Commodity Index has returned nearly 20 percent over the last 12 months and an eye-popping 78 percent since 1999.
But it’s also suffered a 30 percent loss over the last three years.
“Inflation tends to make commodity prices run up to the point where they overshoot like in 2008, so it’s important to use commodities but understand their volatility is very high,” says Polit.
Benz agrees, adding, “With commodities I’d keep the stakes limited because of their potential volatility — ditto for bank-loan funds,” she says. “Anywhere from 5 percent to 10 percent of a portfolio in either category seems like plenty.”
Due to the complexity of rebalancing one’s portfolio with alternative assets, Benz notes target date funds, which automatically become more conservative as the investor approaches retirement, “can be a solid set-it-and-forget-it solution for people who don’t have the time or inclination to find an appropriate asset allocation,” she says. “I also like how these funds put a lot of different investments under the hood of a single vehicle.”
Because they are “blunt instruments,” however, a target-date fund that makes sense for one 45-year old may not work for another “so you need to make sure you’re comfortable with the asset allocation,” says Benz.
Morningstar’s favorite target date funds include the series offered by both Vanguard and T. Rowe Price.
Selecting an asset allocation that’s appropriate for you will not only serve to minimize risk in your overall portfolio, but also help you achieve your long-term financial goals.
Perhaps the biggest benefit, though, is that it gives you the intestinal fortitude to stay the course when the bottom falls out of the market. And it will happen again, says Polit.
“Don’t obsess about keeping up with the market and let your discipline and strategy guide you through volatile times, which can increase your long term success,” he says. “We can’t predict earthquakes, but we can be certain that within the next 10 years there will be another flood, geopolitical or otherwise, and we have to have our portfolios positioned appropriately before it happens.”