by designing a balanced investment portfolio
By dennis & christopher fagan
Many investors found that they had taken on too much risk relative to their tolerance level as the market became choppy this past winter, perhaps selling their investment portfolio at or near the bottom in early February.
Energy, financials and companies with a high anticipated future rate of growth took it on the chin the most. In addition, investors raised cash levels by selling off past winners such as the bio-techs and the FANG (Facebook, Amazon, Network and Google) stocks and/or rotated into the less-volatile utility and telecom sectors. Evidently, the generic disclaimer that “past performance is no indication of future results” meant nothing to many until they were faced with the reality of losing large sums of money.
Having been in this business more than three decades, we have witnessed the bursting of many bubbles, the most recent being the internet and real estate bubbles. Investors, in lemming-like-fashion, after having over-weighted industries that were too economically sensitive and thus fell as the economy tanked, then scurried into riskless money markets and government bonds after the damage had already been done to their portfolios. We believe that this has created a bubble of sorts in that many investors are finding themselves with little or no “risk” and consequently little chance for appreciation in their portfolios or into overcrowded trades such as utilities and telecoms. With the upcoming presidential election, it is not hard to understand that many investors want the certainty of guarantees. However, that certainty will most surely be accompanied by miniscule returns.
These returns tend to be acceptable during periods of negative returns for riskier investments such as stocks, stock-based mutual funds and even corporate bonds. In fact many investors find comfort and may experience almost a sense of “I told you so” when the stock market declines. We encourage investors to take a more balanced, longer-term and perhaps objective look at their financial goals and then design a strategy to help them achieve those goals, rather than utilizing the “rear view mirror” approach noted above.
In fact, according to data published by Ibbotson Associates a 50-50 weighting between stocks and bonds has never produced a negative return over a 10-year rolling period. Not bad for 90 years of data.
THE BOTTOM LINE – It is imperative to design your portfolio according to your objectives, your risk tolerance and perhaps balance out your investments to weather difficult times. This balance enables investors to sleep at night by limiting the volatility of their account values and, during these times, maintain an objective, rational approach to their portfolio, rather than a subjective, emotional one. Investors have found that it is never easy to lose money but, on the other hand, it is also never easy to sit idly by while others make money. The diverse approach of a balanced portfolio gives investors the chance to participate in the upside when markets move higher, as well as more easily weather the downside that will, at some point, inevitably return.
Please note that all data is for general information purposes only and not meant as specific recommendations. The opinions of the authors are not a recommendation to buy or sell the stock, bond market or any security contained therein. Securities contain risks, and fluctuations in principal will occur. Please research any investment thoroughly prior to committing money or consult with your financial advisor. Please note that Fagan Associates, Inc. or related persons buy or sell for itself securities also recommended to clients. Consult with your financial advisor prior to making any changes to your portfolio. To contact Fagan Associates, call 279.1044.