Market Update

Market Volatility: Another Good Reason for a Year-End Review

October 11, 2016

stock market image bulls and bears charging at each otherA year-end portfolio review provides an opportunity to take a thoughtful look back with a financial advisor before planning ahead. This year, with the market's volatility in mind, you may want to take a close look at your asset allocation.

For example, is it time to rebalance your asset allocation (your mix of stock, bond, and money market investments)? Research has shown that rebalancing -- adding to assets that have declined in value below your target allocation or cutting back on assets that exceed your target -- can confuse investors. It may seem counterintuitive: Why reduce holdings that are increasing in value or add to those that aren't?

The answer is that maintaining the proper asset allocation is the key to attempting to ensure that your portfolio falls within your personal risk tolerance and, therefore, that it's not affected by market volatility or other risks more than you expect.

A proper asset allocation may also help ensure that your portfolio has the potential for capital appreciation or income (depending on your goals) that you'd originally intended. Diversification does not assure a profit or protect against loss in a declining market.

An example from the period beginning January 1, 2011, and ending December 31, 2015, shows how a portfolio can change without periodic rebalancing. If an investor began the period with a portfolio allocated 60% to U.S. stocks and 40% to investment-grade bonds, at the end of the period, without rebalancing, market performance would have caused the portfolio to shift to 70% stocks and 30% bonds -- a more aggressive investment mix when compared with the original allocation.1

Rebalancing is always important, but it may be critical during periods of volatility. Your financial advisor can help you review your allocation and identify potential areas of improvement for the year ahead.

1 Source: Wealth Management Systems Inc., a wholly-owned subsidiary of DST Systems, Inc. Stocks are represented by the S&P 500, a commonly used measure of the broad U.S. stock market; bonds by the Barclays U.S. Aggregate Index. Past performance is no guarantee of future results. Asset allocation does not assure a profit or prevent against loss in a declining market. Indexes are unmanaged, and their returns assume reinvestment of dividends and, unlike mutual funds, do not reflect any fees or expenses associated with a mutual fund. It is not possible to invest directly in any index.

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It is important to remember that investing entails risk. Stock markets and investments in individual stocks are volatile and can decline significantly in response to issuer, market, economic, political, regulatory, geopolitical, and other conditions. Investments in foreign markets through issuers or currencies can involve greater risk and volatility than U.S. investments because of adverse market, economic, political, regulatory, geopolitical, or other conditions. Emerging markets can have less market structure, depth, and regulatory oversight and greater political, social, and economic instability than developed markets. Fixed Income investments, including floating rate bonds, involve risks such as interest rate risk, credit risk and market risk, including the possible loss of principal. Interest rate risk is the risk that interest rates will rise, causing bond prices to fall. The value of a portfolio will fluctuate based on market conditions and the value of the underlying securities. Diversification does not assure or guarantee better performance and cannot eliminate the risk of investment loss. Investors should contact a tax advisor regarding the suitability of tax-exempt investments in their portfolio.