As interest rates continue to stay high to combat inflation and talk of a looming recession intensifies, many investors are understandably keeping a closer eye on their portfolios and financial plans.
During times of uncertainty, the job of a financial adviser is to both manage investments and support clients through the ups and downs of their wealth management journey. From sticking to your financial plan and building a cash reserve, to offering perspective during market volatility, financial advisers know your portfolio is more than just investments; it is your financial legacy.
Here are three things to keep in mind.
Long-term thinking prevails
Investors who have identified their goals and crafted a long-term financial plan to achieve them are far more likely to remain invested despite market volatility or the panic resulting from unrealized losses in their portfolio’s value.
Applying a long-term investment horizon for your financial goals to materialize will allow you and your financial adviser to set a suitable targeted rate of return for your investment strategy. Doing so encourages investors to avoid obsessing over daily, weekly or monthly returns, and statistically increases the chances of achieving a targeted return rate.
For example, the S&P 500 fell 19.44 per cent in 2022, its worst year on record in more than a decade, but the one-year rate of return for the index since its introduction in 1957 ranges from anywhere from -38 per cent to 38 per cent, a massive scale with tremendous potential for volatility and negative returns.
However, widen the time horizon of your investment to five, 10, 15 or 20-plus years, and the return range narrows the longer you stay invested. In the case of the S&P 500, the 20-year return from 2002 to 2022 is 8.19 per cent.
Illustrative charts are a great aid to help investors visualize the benefits of long-term investing. One such chart, comparing a portfolio’s cumulative invested capital relative to the value of the portfolio is often-times a reassuring visual. It can provide comfort that while your portfolio may have decreased over the past year, you may have not lost money. It’s important to focus on where you are relative to your cumulative invested capital.
This mindset, coupled with a long-term, goals-oriented financial plan, is a powerful remedy in stomaching short-term volatility or drops in your portfolio’s value. With a plan in place and a targeted rate of return to benchmark your progress, you’re well on your way to building wealth and achieving your financial goals over the years. Further, by focusing on a targeted rate of return that meets your financial goals, you may not have to take on as much risk in the portfolio.
However, following double-digit declines across all major indexes in 2022, compounded by concerns over an impending recession or slowdown in the first half of 2023, you may still be thinking of more ways to protect your portfolio.
Although it is important to remember that markets are forward looking and are not directly correlated to the economy (an economic recession does not necessarily equal more pain in the markets), there are strategic adjustments that can be made to defend your portfolio against volatile market conditions.
Diversify to derisk your portfolio
Now is not the time to introduce wholesale changes to your long-term portfolio, but there may be opportunities and benefits in making tactical tweaks at the margins to better position your portfolio for the year ahead.
One way to do so is through diversification. Diversifying your portfolio is not limited to altering its weighting between stocks and bonds, but can also be achieved through style.
Investors can diversify using equities of a range of small-, mid- and large-capitalization companies, value and growth funds, or sector and thematic specific funds. You can also diversify your portfolio with alternative investments, private equity and private credit, as well as real estate investment trusts (REITs).
These styles may derisk and lessen the correlation between your portfolio and the broader market, but you should speak with your financial adviser to assess the mix of style diversification that is suitable for your long-term financial plan.
Mitigating risk is important for both your investments and the overall health of your financial plan. It’s important for more risk-averse investors to understand how you are diversified to determine how to best position your portfolio during market volatility.
Risk-tolerant investors can look for opportunities to enter positions at a discount. If you’re comfortable buying clothing or toiletries on sale, why not reliable blue-chip assets?
The tax lens
Investors should also consider how you can leverage different investing accounts to maximize and protect your money from a tax perspective.
For example, you may consider structures such as corporate classes that offer a tax advantage or contemplate opening a registered account for interest-bearing investments. Those nearing retirement may want to consider withdrawing money in their early sixties to take advantage of their basic personal exemption, so that a portion of their withdrawal is tax free.
Protecting your portfolio and managing your behaviour during market volatility is hard. But if you focus on the long term, set a targeted rate of return while also finding ways to reduce — not eliminate — your discretionary spending, you will have the foundation and discipline to grow your money.
Joelle Hall is a portfolio manager and investment adviser at Richardson Wealth.