You’ve been given a gift. The stock and corporate bond markets have had an eye-watering recovery, and the housing market is showing strength too. You now have an opportunity to do a thorough portfolio review from a position of strength instead of during a market meltdown like we had in March.
I’m offering a series of questions that will hopefully inspire you to act, and to guide your thought process.
Is there any reason to change my strategic asset mix (SAM)?
SAM is the mix of assets (cash, bonds, stocks and real estate) that fits your objectives, financial situation and personality. It’s a long-term target around which your portfolio revolves.
The word strategic refers to the fact that it doesn’t change very often. It will need to be altered gradually due to aging (less risk, more income), or if your personal circumstances change significantly (i.e. job loss, inheritance), but otherwise, it can stay the same for years, even decades.
In answering this key question, try to divorce yourself from the current political and economic landscape. You can get to that later. First, you need to determine what type of portfolio makes sense for you in all types of markets.
Is my portfolio as diversified as it should be?
When trends persist for a long time, portfolios tend to creep toward what’s been working. We’ve gone through a remarkable period with declining interest rates, minimal credit defaults, industry consolidation and raging bull markets in real estate and U.S. technology stocks. Part of your dispassionate review should be a check to see if, within your broad asset categories, you’re too heavily tilted towards what’s worked in the recent past. For instance, are you mostly holding Canadian banks, U.S. large-cap stocks and high-yield bonds?
Some of these trends may persist, but there needs to be something in your portfolio that can take the baton for when the others get tired or reverse course. To quote the late Peter Bernstein, “If you are comfortable with everything you own, you’re not diversified.”
Do I have an upcoming need for cash?
If you want to renovate the kitchen, fund a child’s or grandchild’s education, or buy a cottage, now is a good time to set the money aside. You won’t know until later if it’s the best time, but that’s not the point. You want the money to be there when you need it and not be subject to another downdraft in the stock market.
Do I need to make changes?
If the answers to the first three questions reveal gaps or shortcomings, get on with making the necessary changes. Trading volumes are high so the cost of making a change is low. Volatility is also elevated, which means that, with patience, you’re more likely to get your price. To repeat, it’s better to implement a strategy in calmer times, even if it turns out to be the eye of the storm.
Should I be getting more tactical with my portfolio?
Finally, the question you’ve been asking yourself every day. Is there something you should do in light of the bizarre circumstance we find ourselves in? Should you get on the bandwagon and buy more technology stocks, or conversely, sell all your stocks and stock funds in anticipation of a sluggish economic recovery?
The answer for almost everyone in almost every situation is no. Straying from your SAM due to what’s happening on the political and economic scene is a mug’s game. You’ll get it right sometimes and feel brilliant, but there’ll assuredly be other times when you get your head handed to you.
Certainly, you shouldn’t act boldly unless you have an insight that’s not currently being factored into security prices. If that insight relates to trade tensions, the U.S. election, or the pace of the post-COVID recovery, be assured that it’s not unique. Millions of people have already acted on the same views. If you feel compelled to do something, move deliberately and in small increments. It doesn’t have to be all or nothing.
Am I being the rational one?
The markets are doing what they always do. On long-term charts, they’re trending up and to the right, but along the way they’re being illogical, unpredictable and prone to exaggeration. Now is a good time to be the rational one and make decisions based on your long-term plan. The excitable Mr. Market has given you a gift. It would be a shame to waste it.
Tom Bradley is
chair and chief investment officer
at Steadyhand Investment Funds, a company that offers individual investors low-fee investment funds and clear-cut advice. He can be reached at [email protected].