As the equity markets get increasingly risky, investors have several options to review and revise their holdings
Much of 2019 has been dominated by news and views of recession, but it seems fears of an imminent downturn are weakening. Still, as numerous headwinds remain to test the longest-ever bull market, investors should at least think about certain steps they should take as the likelihood of a downturn ratchets up.
One thing to consider, according to the Wall Street Journal, is whether it’s really necessary to sell out of equities altogether. “[E]ven now, when many stocks are richly valued, the market could crawl higher for some time,” the Journal said, citing Wasif Latif, head of investments at the VictoryShares unit of Victory Capital Management.
Based on the economy’s momentum and interest-rate cuts from the Federal Reserve, Latif suggested that investors should swap out some of their stocks that would be more resilient in a downdraft. In particular, ETFs with exposure to reasonably valued quality stocks that provide steady or growing dividends may deserve a place in people’s portfolios.
Price-to-earnings ratios should also be scrutinized, especially in terms of how they compare to prevailing values. U.S. stocks are generally trading with PE ratios in the neighbourhood of 20, with growth stocks sporting values that are significantly higher than the rest of the market.
Greg Powell, deputy chief investment officer at Miller/Howard Investments, warned that stocks trading at loftier valuations could underperform in case the economy hits a soft patch. For that reason, investors should check the P/E ratios of funds or ETFs they own, and add value-focused funds or ETFs as necessary to pare their risk.
While equities are generally volatile assets by nature, investors may be subjecting themselves to wilder-than-necessary swings by taking on overly unstable companies or sectors. To avoid such missteps, USAA advice director Robert Steen recommends comparing the equities portion of a portfolio with a benchmark such as the S&P 500. Portfolio analysis tools, offered by some online brokerage sites, may also be useful in gauging stress and risk.
Portfolios with plenty of single-stock exposure must also be reviewed periodically. Some positions can get disproportionately large, particularly when it comes to rapid-growth companies or sectors in which investors become overly enamoured.
“Anytime you own too much in one sector, you’re exposing yourself to more risk,” New Jersey-based wealth advisor Jordan Kaufman said. He suggested a more balanced approach, which is to own some stocks or ETFs in each of the 11 market areas covered by the S&P.
And while common sense dictates a move into defensive stocks in the face of downturn fears, many investors have already piled in, boosting valuations in areas such as consumer staples and utilities. Aside from the rich valuations, Powell said that the possibility of long-term appreciation that lags inflation should make retiree investors think twice before investing in such sectors.
“It might make sense to look elsewhere—which, for less-experienced investors, might justify paying a little more in management fees and buying a conservative actively managed fund,” the Journal said.
