As we settle into 2024, with our first real taste of Indiana winter this weekend, it is a good time to review your investments and potentially make adjustments based on your results in 2023.  
Plus, reviewing your portfolio is something you can do inside and justify putting off shoveling the driveway.
Periodic rebalancing is important to portfolio management because it helps to ensure that your asset allocation matches your long-term strategy for reaching your financial goals. Each asset class performs differently throughout the year, and this variance can result in your portfolio not being in tune with your asset allocation plan. Being overweight or underweight in certain asset classes can lead to a portfolio that is more volatile than you intend or one that does not perform as well as it could. Recently, domestic stocks have outperformed international ones, growth stocks have outperformed value, and large companies have outperformed small ones. (Source: Morningstar) This disparity could lead to a portfolio that is has more domestic large cap growth exposure than you intend.
2022 was a rough year for both stocks and bonds, with both asset classes experiencing negative returns. In 2023, stock market indexes largely recovered, while bonds have not. Despite challenges in recent years, bonds remain a crucial component of diversified portfolios. Historically, bonds have been less volatile than stocks, and currently, investors may find yields attractive relative to recent history and relative to the valuation of stocks. While bonds may offer stable, less volatile returns, a balanced approach, including an allocation to stocks, may potentially be important for long-term growth.
Yields on cash are finally more in line with historical averages, offering investors the opportunity to earn on their short-term investments and savings. As inflation has decreased, many cash investments are yielding positive real, or inflation adjusted, returns. Some traditional brick and mortar banks have lagged in raising rates on savings accounts, demand deposits and the like. Money market mutual funds, treasuries and high yield savings accounts may prove attractive in efforts to maximize returns on cash.
However, while overweighting cash can be a useful tactic, it may not be a long-term solution. Yields on cash investments can change rapidly, and expectations of lower rates in the near future warrant caution. High inflows in money market funds underscore the need to differentiate between short-term goals and long-term wealth-building strategies.
Although inflation has come down significantly, it is still a factor to be monitored. This week Consumer Price Index data showed an unexpected uptick in inflation. (Source: Yahoo Finance) The Federal Reserve (the Fed) continues to work towards its state goal of getting inflation down to 2% per year. However, even if the Fed is successful in achieving that goal, it is important to note that any inflation erodes purchasing power over time. In addition, market participants have been focused on inflation data for the last year or two, which could mean that any unexpected, sustained uptick in inflation could lead to increased volatility for financial markets, including both stocks and bonds.
As we noted earlier, recently large domestic stocks have outperformed small ones. This could lead to an opportunity in smaller company stocks. Last year, many investors were focused on the performance of the Magnificent Seven, seven mega-cap growth stocks that were responsible for a large part of the return of the S&P 500. Anytime a narrow group of investments outperforms the overall market, it can lead to opportunities in other areas. It is important to keep in mind that small cap stocks can be more volatile than other asset classes.
Navigating the intricacies of the investment landscape requires a thoughtful and strategic approach. By incorporating portfolio rebalancing, optimizing bond and cash holdings, and considering the potential of small-cap stocks, investors may be able position themselves for long-term success while mitigating risks associated with market fluctuations.
All performance referenced is historical and is no guarantee of future results.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
Rebalancing a portfolio may cause investors to incur tax liabilities and/or transaction costs and does not assure a profit or protect against a loss.
Asset allocation does not ensure a profit or protect against loss.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
Securities and financial planning offered through LPL Financial, a registered investment advisor. Member FINRA/SIP.