Tuning Up Your Portfolio

Courtney Jones, CFP®
Posted on 
January 4, 2023

Tuning Up Your Portfolio for 2023

The combination of high inflation, the Federal Reserve’s aggressive program of rate increases, and economic and geopolitical uncertainty has meant volatile markets and the vanishing of traditional sources of portfolio diversification.

Progress has been made, but as the new year unfolds, it will bring additional challenges, including a potential recession. How will that affect financial plans and investment portfolios? There are some things you can do to help your plan ride out more volatility and also keep things on track.

Are You Diversified?

Equities and bonds have historically been negatively correlated, meaning that when market or economic factors drive one down, the other is usually up. This reflects a push-and-pull between these two asset classes that is partly driven by investor behavior.

Equities generally carry more risk than bonds but may offer more return. Environments in which the prospects for equities are positive result in investors piling into equity positions and pulling money out of bonds. When investors are concerned about economic conditions, the "risk-off" trade goes into effect, and investors exit equity positions for the relative safety of bonds.

This has worked for decades, but there are some environments when equities and bonds move in tandem. With inflation far from under control and the Fed insisting it is not done on interest rates, we may see more return-killing volatility up ahead.

Assess your existing portfolio:

• Have market moves resulted in positions that have crept above or fallen below your target allocations? This can result in overconcentration. Consider a rebalancing strategy that incorporates tax-loss harvesting.

• We are clearly in a new phase of the business cycle. Consider tactical moves to defensive sectors that can perform well in an economic downturn.

• Assets that are not correlated to the public markets – meaning either equities or bonds – may provide sources of diversification. These may include real estate, commodities, private equity, and private credit.

Tax-Loss Harvesting and Re-Deploying Cash

Once you’ve identified where your portfolio is out of line with your target allocation, you’ll need to determine what to sell. Keep in mind:

• The IRS has created a hierarchy for how losses can be used to offset gains. Short-term losses offset short-term gains, and long-term losses offset long-term gains. If your short-term losses exceed your short-term gain, the excess can be applied to long-term gains and vice-versa.

• If you are selling a position you acquired over time at different costs, look at the cost basis and maximize your tax benefits by selling the highest-cost-basis shares.

Once your strategy for selling is in place, you need to consider how to redeploy the cash that results. With market volatility likely to remain elevated, selecting an entry point can be difficult. Reinvesting all at once can leave you vulnerable to large market shifts. One approach to avoid this is dollar-cost averaging. In this strategy, you invest the same amount each month regardless of how the market performs. The goal is to help you make consistent investments and avoid ill-timed decisions because you're buying in at every price point.

Cash Is King? Or Maybe Duke?

After years of earning almost zero, certificates of deposit and some savings accounts are now paying significant amounts of interest. Does this mean cash should be a bigger piece of your investment strategy? A better way to answer the question is to think about the role of cash.

If you're still working, you should have enough in cash to cover three-to-six months of living expenses. Think about this as an insurance policy. You want your insurance policy to cover the replacement value of the asset, like a car or a house. Translating this to your rainy day fund, you want to have enough saved to cover all your expenses, not just the big things.

If you're retired, you may want to keep as much as three-to-five years of living expenses in cash. Having a cushion this big can help you ride out downturns in the market without having to draw from investments.

In either case, this is already a substantial sum. Does it make sense to pull even more of your assets out of higher-growth potential assets? Probably not. However, it can add meaningfully to your cash investment to rethink where you are holding it. There are likely better options if your savings account is still paying near zero.

The Bottom Line

One way to think about 2022 is that it marks a transition. The nuts and bolts of managing your portfolio were less important when the stock market increased every year. We are now entering a period when gains may not be as robust and where it will pay to invest time in tuning up your portfolio so it can be positioned to ride out volatility.

1. Peterson Foundation. Why Are Americans Paying More for Healthcare? February 16, 2022. Peter G. Peterson Foundation.

Tuning Up Your Portfolio

Courtney Jones, CFP®
Posted on 
January 4, 2023
Tuning Up Your Portfolio

Tuning Up Your Portfolio for 2023

The combination of high inflation, the Federal Reserve’s aggressive program of rate increases, and economic and geopolitical uncertainty has meant volatile markets and the vanishing of traditional sources of portfolio diversification.

Progress has been made, but as the new year unfolds, it will bring additional challenges, including a potential recession. How will that affect financial plans and investment portfolios? There are some things you can do to help your plan ride out more volatility and also keep things on track.

Are You Diversified?

Equities and bonds have historically been negatively correlated, meaning that when market or economic factors drive one down, the other is usually up. This reflects a push-and-pull between these two asset classes that is partly driven by investor behavior.

Equities generally carry more risk than bonds but may offer more return. Environments in which the prospects for equities are positive result in investors piling into equity positions and pulling money out of bonds. When investors are concerned about economic conditions, the "risk-off" trade goes into effect, and investors exit equity positions for the relative safety of bonds.

This has worked for decades, but there are some environments when equities and bonds move in tandem. With inflation far from under control and the Fed insisting it is not done on interest rates, we may see more return-killing volatility up ahead.

Assess your existing portfolio:

• Have market moves resulted in positions that have crept above or fallen below your target allocations? This can result in overconcentration. Consider a rebalancing strategy that incorporates tax-loss harvesting.

• We are clearly in a new phase of the business cycle. Consider tactical moves to defensive sectors that can perform well in an economic downturn.

• Assets that are not correlated to the public markets – meaning either equities or bonds – may provide sources of diversification. These may include real estate, commodities, private equity, and private credit.

Tax-Loss Harvesting and Re-Deploying Cash

Once you’ve identified where your portfolio is out of line with your target allocation, you’ll need to determine what to sell. Keep in mind:

• The IRS has created a hierarchy for how losses can be used to offset gains. Short-term losses offset short-term gains, and long-term losses offset long-term gains. If your short-term losses exceed your short-term gain, the excess can be applied to long-term gains and vice-versa.

• If you are selling a position you acquired over time at different costs, look at the cost basis and maximize your tax benefits by selling the highest-cost-basis shares.

Once your strategy for selling is in place, you need to consider how to redeploy the cash that results. With market volatility likely to remain elevated, selecting an entry point can be difficult. Reinvesting all at once can leave you vulnerable to large market shifts. One approach to avoid this is dollar-cost averaging. In this strategy, you invest the same amount each month regardless of how the market performs. The goal is to help you make consistent investments and avoid ill-timed decisions because you're buying in at every price point.

Cash Is King? Or Maybe Duke?

After years of earning almost zero, certificates of deposit and some savings accounts are now paying significant amounts of interest. Does this mean cash should be a bigger piece of your investment strategy? A better way to answer the question is to think about the role of cash.

If you're still working, you should have enough in cash to cover three-to-six months of living expenses. Think about this as an insurance policy. You want your insurance policy to cover the replacement value of the asset, like a car or a house. Translating this to your rainy day fund, you want to have enough saved to cover all your expenses, not just the big things.

If you're retired, you may want to keep as much as three-to-five years of living expenses in cash. Having a cushion this big can help you ride out downturns in the market without having to draw from investments.

In either case, this is already a substantial sum. Does it make sense to pull even more of your assets out of higher-growth potential assets? Probably not. However, it can add meaningfully to your cash investment to rethink where you are holding it. There are likely better options if your savings account is still paying near zero.

The Bottom Line

One way to think about 2022 is that it marks a transition. The nuts and bolts of managing your portfolio were less important when the stock market increased every year. We are now entering a period when gains may not be as robust and where it will pay to invest time in tuning up your portfolio so it can be positioned to ride out volatility.

1. Peterson Foundation. Why Are Americans Paying More for Healthcare? February 16, 2022. Peter G. Peterson Foundation.

Registered Representative of Sanctuary Securities Inc. and Investment Advisor Representative of Sanctuary Advisors, LLC. Securities offered through Sanctuary Securities, Inc., Member FINRA, SIPC.  Advisory services offered through Sanctuary Advisors, LLC., an SEC Registered Investment Advisor. Credo Wealth Management is a DBA of Sanctuary Securities, Inc. and Sanctuary Advisors, LLC. This work is powered by Advisor I/O under the Terms of Service and may be a derivative of the original. This communication has not been reviewed for completeness or accuracy, does not necessarily reflect the views of Sanctuary Securities, Inc. or Sanctuary Advisors, LLC., and is not a recommendation or endorsement of any product, service, or issuer. For additional information, please refer to one of the following consumer websites: www.FINRA.org, www.SIPC.org.

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