How Have You Adjusted a Portfolio for Changing Market Conditions?

How Have You Adjusted a Portfolio for Changing Market Conditions?

When market conditions shift, even the steadiest portfolios can feel the tremors—prompting seasoned professionals like a Financial Advisor and a Senior Product Manager for Retirement Investment Solutions to adjust their strategies. Alongside their expert adjustments, from advising clients to hold steady to increasing allocations to global stocks, we've also gathered additional answers that provide a broader perspective on strategic responses. These insights range from diversifying investment types to focusing on value stocks for stability, offering a snapshot of how diverse tactics can navigate market volatility.

• Advise Clients to Maintain Course
• Increase Allocations to Global Stocks
• Diversify Across Investment Types
• Build Cash Reserves for Flexibility
• Realign Asset Allocation Strategically
• Utilize Derivatives for Protection
• Focus on Value Stocks for Stability

Advise Clients to Maintain Course

A good Financial Advisor will tinker with client portfolios during changes in market conditions. This is the easy way out, as clients will think, "My Advisor is on top of it."

A great Financial Advisor will take the more difficult route, which is often telling the clients they should do nothing during changes in market conditions. A great financial plan will work regardless of what the market is doing at any given time.

There will always be changing market conditions, and this should be built into the client's financial plan as well as communicated to the client often from day one.

Increase Allocations to Global Stocks

Looking ahead, we see a fight between earnings growth and valuations, a key theme for the second half of 2024. After steep inflation allowed companies to hike prices to defend earnings, the next climb will be cost control and margin expansion as inflation cools. While supply chains have improved and wage growth has slowed, a tight labor market could create headwinds for earnings. Margins have expanded in 2024 but are already above historical averages, making further significant gains challenging for the S&P 500.

This is an opportunity for a portfolio adjustment, specifically where valuations have been cheaper for international stocks over the past 15 years. However, a shift in the global landscape may be coming. A rebound in consumer spending abroad, where consumer discretionary companies are trading at nearly a 50-percent discount to U.S. firms, could drive a rebound in equity prices. As the year continues, valuations may decline as it becomes more difficult to maintain high compounded growth rates.

Given the expectations for elevated growth and a modest decline in valuations, we still see the S&P 500 continuing to increase in the second half of 2024. As I look to adjust portfolios, I am increasing allocations to smaller-cap and international stocks.

Diversify Across Investment Types

In response to fluctuating markets, financial advisors often broaden the range of investments within a client's portfolio to spread out potential risks. This approach is akin to not putting all your eggs in one basket, offering a safety net against the decline of any single investment. By including a mix of stocks, bonds, and other assets, they create a buffer that can absorb shocks from market volatility.

This strategy can help maintain the overall health of the investment portfolio even when certain sectors face downturns. Consider contacting a financial advisor to explore how diversifying your portfolio can secure your investments against unpredictable market shifts.

Build Cash Reserves for Flexibility

Financial advisors may guide clients to increase their cash holdings during periods of market uncertainty. Having extra cash can act as a financial cushion, allowing individuals to manage their daily needs without the pressure to liquidate investments at a loss. Furthermore, this strategy can position investors to take advantage of new opportunities that arise when the prices of stocks and other assets drop.

Building a reserve fund can be particularly effective in providing the flexibility to make strategic moves. Start setting aside additional cash now to strengthen your financial position for the future.

Realign Asset Allocation Strategically

In dynamic markets, a common adjustment made by financial advisors is the realignment of a client's investment mix, or asset allocation, to fit their original investment strategy. For example, if a certain asset class has grown significantly and now represents a larger portion of the portfolio than intended, agents may sell off excess shares and purchase more of other types to restore balance. This practice helps the investment portfolio to stay aligned with the client's risk tolerance and financial goals.

It avoids overexposure to certain risks and maintains a well-rounded investment approach. Reach out to a financial advisor to see if your investments require realignment to meet your financial objectives.

Utilize Derivatives for Protection

Advisors often utilize financial instruments known as derivatives as a protective measure in volatile market conditions. Derivatives, such as options and futures contracts, can provide a way to lock in prices or insure against significant losses. Though this strategy involves complex financial tools, it can be a powerful way to safeguard an investment portfolio against adverse market movements.

It is especially useful for those with substantial exposure to high-risk assets. Consider seeking expert advice on derivatives if you're looking for ways to protect your investment portfolio.

Focus on Value Stocks for Stability

Another common adjustment made by financial advisors when the market shows signs of instability is to pivot investment strategies towards companies with solid fundamentals and long-term growth potential—often termed 'value stocks'. These stocks are usually undervalued compared to their actual worth and have a reputation for being reliable performers. By focusing on these quality investments, advisors aim to provide stability to portfolios and protect against market downturns.

These stocks can be a cornerstone for building a resilient investment strategy. If this approach resonates with you, think about discussing the inclusion of value stocks in your portfolio with a professional advisor.