During a major economic event, it may be a good time to revisit your portfolio. It could mean rethinking long-term objectives, reexamining your risk tolerance, or taking a moment to self-reflect.
Know if your investment portfolio is well positioned for an economic recovery
Understand what factors to consider for your portfolio as the economy aims to recover
Now that light is beginning to shine at the end of the coronavirus tunnel, this might be a good time to start looking ahead. That light could very well be shining on the next business cycle or economic recovery, and your investment portfolio might need some reconsideration and reflection.
Besides the losses to the economy and businesses, the loss of life and other hardships endured over the last nine or so months are expected to leave an impact for years to come. Keep in mind that any path toward an economic recovery will not be without pitfalls or risks.
But as we collectively dust ourselves off and attempt to get on our feet, with the presidential and other elections (mostly) behind us and the expectation of a COVID-19 vaccine in front of us, it’s time to prepare for an economic recovery and how to adapt your thinking about your portfolio to market fundamentals.
The elephant in the economic recovery room is the pandemic. Recent announcements of breakthroughs in vaccine trials are great news, but that doesn’t necessarily mean COVID-19 is going away anytime soon. Most economists agree that a deep and meaningful economic recovery can’t be achieved without significant, if not total, containment of the virus.
Many investors have already learned to coexist with the pandemic, piling into technology, home furnishings, and other industries that have done well while we adapted to working from and spending more time at home.
Moving forward, consider what’s next for coronavirus-impaired industries like travel, restaurants, and other opportunities as the economy recovers—and what they might mean for your investment portfolio.
“Historically, economic recoveries have included a resurgence in economic activity, higher-than-normal inflation numbers, strong performance in the equity markets, and the Federal Reserve taking some type of measure akin to taking the foot off a gas pedal,” said Viraj Desai, senior manager, portfolio construction, TD Ameritrade.
When reviewing a portfolio, think of what type of investor you are. A more aggressive investor may want to consider more equity investing, particularly after enjoying a year of stronger bond yields. A more conservative investor may want to contemplate more bond-type products to help ride out volatility in the equity markets.
“Consider taking a temperature check or re-underwriting your tolerance for risk,” Desai said. “If the market volatility of the last year didn’t sit well with you, it might be time to temper your portfolio volatility. Or, conversely, it might be time to add some equity if you’re ready to take on more risk to meet your investment goals.”
Think of how the election results might impact industries and businesses. Then think about your investment portfolio objectives over the next year or multiple years, depending on your financial plans.
“While we wait for inauguration, news headlines will inevitably cause market volatility in the short term,” Desai said. “It is important to not react to the short term. Instead, endure the volatility and try to look through these events to what will happen on the other side in the long term.”
How do we know if we’re experiencing a meaningful recovery and not just taking a short market ride up? For the financial markets, Desai looks for upward earnings revisions, a more positive tone from the analyst community, reinstated dividends, and an improving macro backdrop.
“It’s important to maintain discipline. As we see fundamentals improve, start making progressive changes to your portfolio,” Desai said. “The more signs you see of a meaningful recovery, the more successive changes can be considered. That way, if you’re wrong, all your eggs will not be in one basket.”
The idea of not putting all your financial eggs in one basket, no matter how tempting it might be in the short term, is important. No one can keep the promise that we’ll see a meaningful recovery.
For one, the pandemic may not fully abate. There’ll be huge challenges to the supply chain that needs to reach millions of people around the globe. And not everyone will be receptive to taking the vaccine.
Continued fiscal stimulus is still not a guarantee, as indicated by the ongoing negotiations among legislators and the White House. And we may indeed have a recovery, but it could be shallow and long with unemployment not decreasing as much as expected.
How can you best assess your portfolio and meet your investment goals? Consider the TD Ameritrade Personalized Portfolio service or ask for help with goal planning.
Another way to look at your investment portfolio performance is as if you had exited the market versus staying in, and going forward, try to reinforce long-term principles, Desai suggested.
Finally, look at your portfolio to determine what happened since you last gave it a solid review and what you want it to look like if we do see a recovery. As Desai noted, “If your objectives span 10 to 15 years, you may not want to do anything.”
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