Thursday, May 31, 2012, AM | Leave Comment
By now, we all know, according to an increasing number of economists, that the U.S. economy is on its path of full recovery. Some economists are still in doubt. In any case, if you have invested money in stock market, there may still be a silver lining. Historically, the stock market has rallied before the American economy has fully recovered from a recession.
Now may be a good time to start positioning your portfolio in order to potentially benefit from an eventual full market recovery.
There are steps you can take today to be better prepared for an uptick in the economic cycle. These include:
- Rebalancing your portfolio when needed
- Maintaining proper sector diversification
- Sticking with your long-term plan
Most economists expect to see a rally in the stock market before the next economic expansion begins. They currently forecast moderate growth of 2% in U.S. gross domestic product (GDP). That’s lower than historic averages, but shows movement in a positive direction. See U.S. Department of Commerce Bureau of Economic Analysis website.
Rebalancing your portfolio
Following recent volatility in the stock market, many investors’ portfolios may have appeared to be less in stocks and more in bonds.
It’s important for investors to have well-defined asset allocation targets and to review them on a yearly basis and see if they need to make any changes in their portfolios.
The common practice is to get rid of stocks in a bearish market. Most Financial Advisers believe that is a mistake.
If your asset allocation strategy has become unbalanced, re-balancing your portfolio to maintain your optimal asset allocation mix is considered a better step to take.
To do so, you may need to sell asset classes that are over your target allocations and buy asset classes that are under your target allocations.
Maintaining proper sector diversification
Most financial advisers believe one of the biggest mistakes investors make during bear markets is to apply short-term thinking to a long-term investment strategy.
“Investors often become overwhelmed by media coverage of market events, ” says Bruce Raabe, president of Collins & Company LLC, an independent wealth management firm based in Larkspur, Calif. “They then have a hard time cutting through the noise and figuring out which stories are truly important.”
The way to build a well-diversified portfolio is to start with a sound asset allocation plan. That includes deciding what percentage of your portfolio should be in stocks, bonds, and cash or short-term investments.
Sticking with your long-term plan
To create an all-weather portfolio, create a core portfolio of diversified investments that remains fairly static over time.
For those investors who are interested in actively trading individual stocks, hold a few small positions outside of their core portfolio that represent no more than 5% to 10% of overall holdings.
Sticking with a long-term asset allocation plan can be challenging during a bear market, but also very rewarding when the markets rebound.
If you can maintain a disciplined approach to your asset allocation during this difficult market period, you may eventually be rewarded when the economy and the market rebound.
In a Nutshell
Every so often visit your portfolio to be aware of where you stand in your investment strategy.