How to Reduce Risk in Your Portfolio When the Markets Are at an All-Time High
- Philip Prough, CFP®, CIMA®
With the U.S. equity markets at all-time highs, how can an investor reduce risk in their portfolio? The two most common methods are (1) changing your asset allocation or (2) rebalancing your portfolio. In the current market environment, C&N subscribes to the latter method.
The first method should be used when the investor’s goal has changed. For example, you would desire an allocation change when your college savings account will incur a known distribution within the year. In contrast, if the goal hasn’t changed (i.e. you’re one year closer to retirement, which is still 20 years away) then the second method should be your preferred choice.
Rebalancing your portfolio is a risk reduction strategy that ensures gains are pared and proceeds are reinvested into lagging investments. How often should you rebalance? There are many schools of thought, but the answer is “it depends.” For example, this year’s market (both equities and fixed income) has been a full risk-on, momentum driven market. For our tax managed portfolios, we have rebalanced as many as seven times this year. For our 401K plans, we rebalance our model portfolios quarterly. That’s a great service provided to those participants invested within them.
When markets are at all-time highs, diversification becomes paramount. All major categories are at historically elevated levels – equities, fixed-income and alternatives. So I would ask you, if you’re a long-term investor whose goal has not changed, and you believe selling equities is the answer, where will you invest the proceeds that doesn’t have elevated valuations? Cash? Arguably the worse long-term performing asset class of all.
As we enter year-end with strong equity gains, keep the long-term in mind and consider a simple rebalance to your target allocations. It’s important to understand, more often than not, the real risk is not being in the markets. Rebalancing will help reduce volatility and risk.
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Philip is the Chief Investment Strategist and oversees the investment unit of the Trust and Financial Management Group. His responsibilities include the oversight of investment strategies, investment analysis and manager selections. Philip joined C&N in 2000. He was previously responsible for the delivery of C&N’s financial services, including the sales and service of Trust, Brokerage and Insurance services. He also retains administration duties for client accounts.
Prior to joining C&N, Philip’s experience at C&N, Prough Insurance Agency and Parente Randolph provided him with valuable skills and insight to lead his team to success at C&N. Philip’s driving philosophy is that “providing a deep, knowledgeable team gives our clients assurance that we have a sustainable support network to meet their changing financial needs. But it’s our personal service that demonstrates our clients will always be our primary focus.”
Philip is an honors graduate from Lycoming College, receiving his Bachelor's of Arts degree in Accounting. He received his Master of Business Administration from Colorado State University in 2012 and has held the designation of Certified Financial Planner® practitioner since 2003. He also holds various securities and insurance licenses.