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Tuning Up Your Portfolio for 2023

It's important to be aware of the current economic climate and how it may affect your financial plans and investments. With high inflation, rate increases, and uncertainty in the markets, it's important to consider diversifying your portfolio and taking steps to weather potential economic challenges, such as a recession. Let's discuss ways to protect and continue growing your wealth in the new year.

Are You Diversified?

It's important to understand the relationship between equities and bonds in your investment portfolio. Historically, these two asset classes have been negatively correlated, meaning that when one goes down, the other goes up. However, there are some instances when they may move in tandem, particularly in a volatile market with high inflation and interest rates.

It's important to regularly assess your portfolio and determine if market movements have resulted in positions that have moved above or below your target allocations. This can result in overconcentration and it's important to consider a rebalancing strategy that incorporates tax-loss harvesting. Additionally, we are currently in a new phase of the business cycle, it's worth considering tactical moves to defensive sectors that can perform well during an economic downturn.

To diversify your portfolio, consider assets that are not correlated to the public markets such as real estate, commodities, private equity and private credit. These can provide sources of diversification and help to minimize the risk of return-killing volatility.

Re-Deploying Cash

When identifying which positions to sell in your portfolio to align with your target allocation, it's important to keep in mind the IRS' hierarchy for using losses to offset gains. Short-term losses offset short-term gains, and long-term losses offset long-term gains. Additionally, consider the cost basis of the positions you are selling to maximize your tax benefits.

When it comes to reinvesting the cash that results from selling, consider using dollar-cost averaging to avoid ill-timed investment decisions. This strategy involves investing the same amount each month regardless of market performance, and helps to make consistent investments by buying in at different price points.

Cash is King

After years of earning almost zero, certificates of deposit and some savings accounts are now paying significant amounts of interest. Does this mean cash should be a bigger piece of your investment strategy? A better way to answer the question is to think about the role of cash.

If you're still working, it's a good idea to have enough cash to cover 3-6 months of living expenses as a safety net. Think about this as an insurance policy. You want your insurance policy to cover the replacement value of the asset, like a car or a house. Translating this to your rainy day fund, you want to have enough saved to cover all your expenses, not just the big things.

If you're retired, you may want to have as much as 3-5 years of living expenses in cash to weather market downturns. However, it's important to remember that having a substantial amount of cash saved is already a significant portion of your assets.

While it may be beneficial to re-evaluate where you are holding your cash savings and consider options with higher interest rates, it may not make sense to pull even more assets out of higher-growth investments.

The Bottom Line

One way to think about 2022 is that it marks a transition. The nuts and bolts of managing your portfolio were less important when the stock market increased every year. We are now entering a period when gains may not be as robust and where it will pay to invest time in tuning up your portfolio so it can be positioned to ride out volatility


The information contained herein is intended to be used for educational purposes only and is not exhaustive. Diversification and/or any strategy that may be discussed does not guarantee against investment losses but are intended to help manage risk and return. If applicable, historical discussions and/or opinions are not predictive of future events. The content is presented in good faith and has been drawn from sources believed to be reliable. The content is not intended to be legal, tax or financial advice. Please consult a legal, tax or financial professional for information specific to your individual situation.

This content not reviewed by FINRA

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