3 Strategies for Re-Designing Your Portfolio
By Ron DeLegge, Editor
October 26, 2009
SAN DIEGO (ETFguide.com) – Since bottoming in March, U.S. stocks (NYSEArca: VTI), international stocks (NYSEArca: EFA) have roared back by scoring handsome gains. Emerging market stocks (NYSEArca: VWO) have soared even higher.
There are two ways you could interpret the rise in stocks over the past seven months; 1) You could argue that stocks are more resilient than the market expected, or 2) Stocks have come way too far way too fast. Which is it?
Regardless of what opinion you have, redesigning your portfolio to match your investment goals is always a good strategy. Let’s look at three methods.
It’s been suggested by some financial experts that you should create a fictional portfolio of index funds and to benchmark the progress of your portfolio against it. I suggest you do the exact opposite. Since most actively managed mutual funds and handpicked stock portfolios underperform key market indexes, this traditional approach to benchmarking exposes investors to systematic market underperformance. The solution is “reverse benchmarking.”
A better approach is to own the index funds or index ETFs in whatever desired mix or allocation you ascertain and to use a fictional portfolio of active funds and individual stocks to benchmark against. This will give you a real life glimpse at how difficult it is to beat stock, bond and commodity indexes and to help you avoid it. Also, by owning market index funds it will alleviate you with the higher investment cost and higher tax bill associated with active management
Look at the Laggards
Even though benchmarks like the Dow Jones Industrial Average (NYSEArca: DIA) have jumped by 55% since touching their March lows, not all parts of the market are moving ahead at the same velocity. Evidence of this is visible in the year-to-date performance of key industry sectors within the S&P 500 (NYSEArca: SPY).
For example, although all nine S&P sectors are posting positive gains for 2009, defensive areas like consumer staples (NYSEArca: XLP) healthcare stocks (NYSEArca: XLV) and utilities (NYSEArca: XLU) have lagged. Meanwhile, more aggressive sectors like financial stocks (NYSEArca: XLF), basic materials stocks (NYSEArca: XLB) and technology stocks (NYSEArca: XLK) are up between 20% to 38%.
Instead of trying to chase the winning sectors (also known as hot money), one strategy for redesigning your portfolio is to overweight the laggards. In this case, most of the laggards are defensive areas, which tells us the high degree of risk some investors are taking.
How have your investments reacted during this particular bear market rally? For instance, if you’ve seen your stock portfolio rapidly rise, now may be a good time to evaluate your money. Which areas have enjoyed the greatest run-up? Identify these areas and make sure your investment commitment or allocation to a certain stock, mutual fund or ETF isn’t more than what you planned.
Rebalancing your portfolio can help you to realign your investments back to your original goal. Contrary to popular belief, rebalancing does necessarily have to happen at the end of each year or every quarter. Rebalancing can occur on a periodic or as-needed basis.
It’s especially good to consider rebalancing your portfolio if any investments you own become so over concentrated they begin to change the risk dynamics of your portfolio.
Now is a good time to redesign your investment portfolio. This is especially true if your investments have not met your expectations or if they’ve consistently underperformed against major stock and bond benchmarks.
Unfortunately, redesigning your portfolio does not happen by chance. It requires attention, diligence and initiative. But by taking these basic steps, you can get your money back on track and keep it there.