Market Volatility: Another Good Reason for a Year-End Review
October 11, 2016
A 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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This material is presented for informational purposes, and nothing herein constitutes legal, accounting, or tax advice. Please consult with an attorney or tax professional regarding your specific financial, legal or tax situation.
The views expressed here are those of Washington Trust Wealth Management and are subject to change based on market and other conditions. Investment recommendations and opinions expressed in these reports may change without prior notice. All material has been obtained from sources believed to be reliable, but its accuracy is not guaranteed.