Portfolio tips for falling markets

Stick to method during the madness

The big stock market indexes have been on a steep slide since the beginning of the year. Anyone with a passive, “buy-and-hold” type of equity portfolio will know the discomfort this can cause as each day brings another shrinkage in value. Unfortunately, those with significant fixed-income holds have seen the values of their bond portfolios decline as well. It’s been a perfect storm as inflation, central bank rate hikes (to fight that inflation), and geopolitical crises have forced a revaluation of financial assets with attendant pain for many investors. So what can investors do for an analgesic against the discomfort markets are inflicting right now?

First of all, you will want to put your portfolio allocations under a microscrope and rebalance methodically as necessary. Here are the key components:

Asset allocation

The dispersion of your funds among the three key asset groups of safety, income, and growth define the risk that you are willing to accept for the return you expect. When that allocation is skewed by a bearish cycle, your risk profile may have changed as a result. A portfolio that is overweighted to growth investments, such as equities, will suffer more than one that has a balance of equity, fixed income, and cash.

Talk to your advisor about bringing your asset allocation into line with your risk profile, say, by increasing your cash allocation to cushion agains further erosion in equity and fixed-income valuations. An enhanced cash allocation will also position you to take advantage of oversold market conditions.

Diversification

Is your portfolio sufficiently diversified in each main asset class? Diversification is at the heart of best practices portfolio planning. It makes no sense at all from a risk-mitigation perspective to have your portfolio allocated 50% to fixed income and 50% to equities, and then have only one bond and one stock in each class. Review your portfolio to ensure individual asset classes contain sufficiently diversified individual securities.

Security selection

When researched, analyzed, and selected properly, individual stocks and bonds within a portfolio work in harmony to achieve a specific purpose, say a minimum dividend yield or a specific target price gain or a specified yield to maturity. Hasty or ill-advised trading in reaction to unfavourable market conditions can throw that plan right out the window.

Rebalancing should be tentative, methodical, and gradual. Work with your advisor to determine the best sectors and industries to explore as possible recovery candidates. For example, in the current environment, growth sectors like information technology have seen the biggest repricing as investors become more cautious and shift to value stocks.

Portfolio planning

In general, it is far wiser to make longer-term portfolio decisions by considering overall tax efficiency, cost, and risk. Step back from the daily noise of the trading screen for long enough to take a look at your whole portfolio. And then ask yourself:

* Is it tax efficient? Am I attracting maximum tax with every transaction or am I minimizing the tax hit? Am I maximizing my use of Tax-Free Savings Accounts (TFSAs) and Registered Retirement Savings Plans?

* Is it low cost? Am I using investment strategies that reduce my overall trading, transaction, and management costs, such as allocating at least some portion of my asset mix to low-cost exchange-traded funds?

* Am I mitigating risk? Am I diversifying my portfolio with enough non-correlated asset classes to suit my tolerance for risk? Am I using hedging or income-generating strategies with options? Or am I essentially “throwing darts” every day, and hoping for the best?

Robyn Thompson, CFP, CIM, FCSI, is the founder of Castlemark Wealth Management, a boutique financial advisory firm specializing in wealth management for high net worth individuals and families. Contact her directly by phone at 416-828-7159, or by email at rthompson@castlemarkwealth.com for a confidential planning consultation.

Notes and Disclaimer

The foregoing is for general information purposes only and is the opinion of the writer. Securities mentioned are illustrative only and carry risk of loss. No guarantee of investment performance is made or implied. It is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice. Please contact the author to discuss your particular circumstances.