Portfolio Review Time

As far as stock performance is concerned, I think we can all agree that 2020 was an amazing ride. Once the March correction was over and done with, it felt like stocks could only go one way: higher. Many big names reaped big returns, but companies no one had ever heard of also made massive gains. Now that excitement over vaccines, US political stability, unending fiscal and monetary stimulus, and recovering earnings growth has cooled, markets are left with a bull market hangover. We remain optimistic that 2021 will be a strong year for equities ¬– but we also understand that the downside risks are increasing.
While we are clearly far from a “sell it all” moment, a bit of portfolio housekeeping would make a lot of sense right now. An investor’s first defense against market volatility is to ensure their portfolio is appropriately distributed based on their investment objectives and timeline.

The first step is to think strategically rather than blindly selling in a rush to abandon ship. If you do decide to sell assets, do it in a way that won’t jeopardize your investment goals (and if you don’t know what your investment goals are… now is a great time to define them).

Spring cleaning

We all hold stocks amassed as a result of misguided epiphanies or “hot” tips from a friend of a friend; now is a good time to review whether they are worth keeping in your portfolio. Would you invest in those stocks today, given the environment? Is the fundamental long-term rationale as solid as when your friend made their recommendation? There is no loyalty on Wall Street, and a quick look at a company’s earnings, balance sheet and product positioning can help give you some insight into which positions to close out. Proceeding item by item is a strategically smart and easy way to raise cash and rebalance your portfolio.

Rebalancing

In the heat of a bull rally, rebalancing can easily be relegated to the sidelines; the next thing you know, Apple, Google and Tesla make up 65% of your portfolio. This is where having a target portfolio allocation makes sense. Sticking to your chosen asset allocation and general risk profile by selling overweight and buying underweight to keep your portfolio in line is good practice and can be largely automated, thereby reducing the need to think too much about which positions to adjust.

Know when to fold ‘em

Even Kenny Rogers knew this important rule of trading. Some stocks have generated eye-watering returns over the last six months. In some cases, collapsed earnings growth has defied all rationality to justify valuations; in others, investors have simply gotten ahead of themselves. I dream of ten-baggers as much as the next investor, but it’s important to understand that valuations sometimes just aren’t warranted. In such cases, now is a good time to “take the money and run”. In addition, selling losing positions not only raises cash but could have tax benefits (a strategy known as tax-loss harvesting).
Appropriately rebalancing your portfolio will set you up for whatever is about to happen next.