As we approach the halfway point of the year, this is a great time to evaluate your financial planning goals and review your investment portfolio. This mid-year check is essential to ensure you are on track to achieve your financial goals.
Economic conditions can change significantly within a few months, impacting different asset classes in different ways, so re-evaluating your portfolio can help you make necessary adjustments in response to market trends such as the recent all-time highs.
Diversification:
Spreading the risk
One of the fundamental principles of a sound investment strategy is diversification, which involves spreading your investments across different asset classes to reduce risk. By the middle of the year, you can analyze how diversified your portfolio is and whether it is in line with your risk tolerance and financial goals.
For example, if a particular sector or asset class, such as technology stocks, is performing exceptionally well, it may have a higher weighting in your portfolio than originally intended. While it’s nice to see high returns, this can lead to undue concentration risk. Conversely, underperforming sectors may need to be evaluated for their future potential or replaced with better-performing alternatives.
A mid-year review can help you rebalance your portfolio to ensure you are maintaining the right mix of stocks, bonds, real estate and other investments. This rebalancing is essential for risk management and can increase your long-term return potential.
Asset Allocation:
Alignment with goals
Asset allocation refers to the distribution of your investments among different asset categories. The optimal allocation depends on factors such as your age, risk tolerance, and investment time horizon. By mid-year, it’s a good idea to review your asset allocation to see if it still aligns with your financial goals and life situation.
For example, if you’re approaching retirement, consider moving part of your portfolio out of risky stocks and into bonds that offer more stable income. Or, if you recently received a bonus or inheritance, you might have some extra money to invest and need to reevaluate your asset allocation strategy.
Moreover, market conditions in the first half of the year could impact the performance of various asset classes: if stocks are soaring to all-time highs, it may be a wise time to lock in some of your profits and reallocate them to undervalued assets or safe havens like gold and government bonds.
Performance rating:
Winners and Losers
Reviewing how your investments are performing is an important part of any mid-year financial check-up. Identifying investments that have performed exceptionally well or poorly can give you insight into market trends and help you make future decisions.
High performer
Investments that have produced strong returns are worth taking a closer look. While it can be tempting to continue riding the wave of success, it is essential to evaluate whether these gains are sustainable. Highly performing assets may have reached or surpassed their intrinsic value and are at increased risk of a correction. In such cases, consider reducing these positions to lock in profits and reduce your exposure to potential volatility.
Poor graders
Conversely, underperforming investments should be scrutinized to understand the underlying reasons. If a particular stock or fund is consistently underperforming, it may be due to a temporary setback, mismanagement, or industry-wide challenges. It is important to distinguish between short-term fluctuations and long-term declines. In the case of temporary poor performance, it may be advantageous to hold or buy more if you believe in the potential for a recovery in your assets. However, persistently poor performance may be an indication that you should sell and redirect your capital to more promising opportunities.
Adjusting strategies to market conditions
The recent market rally brings both opportunities and risks. On the one hand, a market rally can increase the value of your portfolio, but on the other hand, it can also signal higher asset prices and increased volatility. Conducting a mid-year review can help you strategically navigate these conditions.
For example, during surging markets, it may be wise to adopt a more defensive investment approach. This could involve increasing your allocation to bonds, dividend stocks, and other low-risk assets. Additionally, reviewing and updating your financial goals can help ensure they remain relevant amid changing market trends and personal circumstances.
The Need for Planning
Interim financial reviews are not just a routine exercise, they are a strategic necessity: focusing on diversification, asset allocation and investment performance allows you to make informed adjustments that align with your financial goals.
Regularly reviewing your financial plan and portfolio can help you proactively manage risks and seize opportunities, helping you maintain financial health in the face of market volatility.
This information should not be construed by any client or prospective client as providing personalized investment advice. For more information, please visit BushWealth.com to read our full disclosure.
