Year-End Financial To-Do: Review and Rebalance Your Portfolio in this Post-Election Environment

Nov 24, 2020

By Bruce Buerkle, CFA, Senior Vice President, Manager Securities Research Support

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As we close in on the final weeks of 2020, we are faced with many challenges that will still be with us as we turn the calendar. We continue to navigate through the coronavirus pandemic and the vast economic problems resulting from measures taken to keep us safe. The markets have been thrown numerous curveballs this year and have been quite volatile. Despite the pullbacks, the indices have been resilient when compared with the double-digit gains the popular averages experienced in 2019.

The year 2020 brought nearly zero percent interest rates from the Federal Reserve, and stimulus measures were introduced to help buffer the economic pullback. The Fed recently reiterated its intentions to remain accommodative through 2022, and this is likely to influence market returns. Recent updates for both the Producer Price Index and the Consumer Price Index show inflation remains in tow. The Unemployment Rate was 3.5% in February and skyrocketed to 14.7% in April as many regions and sectors of the economy shut down. Although personal impacts are still very significant, some modest coping with the pandemic has taken place and the Unemployment Rate has dropped each subsequent month and was 6.9% in October.

Corporate profits and outlook commentary have recently come in better than what was expected earlier in the pandemic. We witnessed a rebound in third-quarter Gross Domestic Product, with the first estimate rising at a 33.1% annual pace, which was better than expected (second-quarter GDP was revised to a negative 34.1% annualized rate).

Uncertainties abound following the Presidential election. We are facing the unknowns of a new administration and resulting policy changes. Shifts in the makeup of the House and Senate are not completely known. We know plans put forth by a candidate pre-election may not pan out in the long run. We should be cognizant of proposed changes, but they should not be a driver when rebalancing a portfolio for year-end 2020.

Amidst all of this, the overlay wild card is the timing and success of multiple COVID-19 vaccines on the horizon and the herculean task ahead of us to turn vaccines into vaccinations to tamp down the virus. As a result of numerous shifts in market performance this year and the questions facing us, we are presented with a great opportunity to review our investment assets to be sure we continue to be allocated appropriately to meet our long-term goals.

There are a number of key points to take into consideration and your Financial Advisor has the tools to provide the information needed to help you work through these questions. Here are a few considerations:

  • Investment Objective – Has your investment objective and risk orientation changed since your last review? Are you seeking growth, growth and income or income? Have you performed a risk assessment to see where you fall on the spectrum from conservative to moderate to aggressive?
  • Investment Horizon – What is your investment time horizon? You may be younger with many years to contribute to your portfolio, and to have the principles of compound growth and dividend reinvestment working for you. Or you might be near retirement and more conservative, so income-producing investments may be more important and suitable.
  • Lifestyle – Do you anticipate any other lifestyle changes that need to be considered in year-end portfolio planning? Even if there has not been a change, it is important to look at your current asset allocation to be sure your investment mix of cash equivalents, bonds and stocks (or funds in these asset classes) remain appropriate. Assets classes can produce different returns, both positive and negative, depending upon the stage in the economic cycle, interest rates and sensitivity to domestic and global events.
  • Diversification – Is your portfolio properly diversified both across and within asset classes? Diversification is essential in order to spread risk and widen the potential for gain. Rules of thumb include no more than 15% of a portfolio in any one security and no more than 25% in any one sector, with a guideline position size of about 5%. Too many small positions can make a portfolio difficult to manage.

There are 11 sectors represented in the S&P 500 and you should have representation in most – if not all – of them in order to mitigate risk either through individual securities or funds. Check to see if you have any over-weighted or concentrated positions. Investments that are too heavy in one or more securities can exposure your principal to great risk should an unforeseen development occur with the company or in its industry. Here are a couple to-dos:

  • Rebalance – Although rebalancing is appropriate at any time, it should be part of your year-end review. Most of your position values are likely quite different than they were at the beginning of the year. Therefore, if we look at how your assets are allocated across asset type, investment style or equity sector, the weightings may be different due to varying security and asset class returns and this movement could be exposing your portfolio to increased risk. Rebalancing is the process of buying and selling securities in your portfolio in order to restore the investment to its original state. If your investment objective and risk orientation have changed, rebalancing would move your weightings closer to the appropriate levels.
  • Review All Investment Assets – When reviewing your portfolio, be sure to take all investment assets into consideration in order to have a unified approach and to check for overlaps that could increase risk. Of course, potential tax ramifications always need to be taken into consideration when making any changes in your portfolio.

Note: no investment strategy – including rebalancing, asset allocation and diversification – can guarantee a profit or protect against loss in periods of declining values. Rebalancing investments may cause investors to incur transactions costs and, when rebalancing a non-retirement account, taxable events will be created that may increase your tax liability.