Over time, different investments’ performances can shift a portfolio’s intent and risk profile. Rebalancing may be critical.

Everyone loves a winner. If an investment is successful, most people naturally want to stick with it. But is that the best approach?

It may sound counterintuitive, but it may be possible to have too much of a good thing. Over time, the performance of different investments can shift a portfolio’s intent – and its risk profile. It’s a phenomenon sometimes referred to as “risk creep,” and it happens when a portfolio has its risk profile shift over time.

When deciding how to allocate investments, many start by taking into account their time horizon, risk tolerance, and specific goals. Next, individual investments are selected that pursue the overall objective. If all the investments selected had the same return, that balance – that allocation – would remain steady for a period of time. But if the investments have varying returns over time, the portfolio may bear little resemblance to its original allocation.

How Rebalancing Works

Rebalancing is the process of restoring a portfolio to its original risk profile.1

There are two ways to rebalance a portfolio.

The first is to use new money. When adding money to a portfolio, allocate these new funds to those assets or asset classes that have fallen. For example, if bonds have fallen from 40% of a portfolio to 30%, consider purchasing enough bonds to return them to their original 40% allocation. Asset allocation and diversification are investment principles designed to manage risk. However, they do not guarantee against a loss.

The second way of rebalancing is to sell enough of the “winners” to buy more underperforming assets. Ironically, this type of rebalancing actually forces you to buy low and sell high.

Periodically rebalancing your portfolio to match your desired risk tolerance is a sound practice regardless of the market conditions. One approach is to set a specific time each year to schedule an appointment to review your portfolio and determine if adjustments are appropriate.

Shifting Allocation

Over time, market conditions can change the risk profile of an investment portfolio. For example, consider a hypothetical portfolio that was 50% invested in bonds, 10% in treasuries, and 40% in equity. Over the course of a few years, if the stock portion of the portfolio outperformed the other assets, the hypothetical portfolio may no longer reflect the initial allocation. An adjustment may be needed to reflect the original risk profile. Keep in mind that investing involves risks, and investment decisions should be based on your own goals, time horizon, and tolerance for risk. The return and principal value of investments will fluctuate as market conditions change. When sold, investments may be worth more or less than their original cost. This is a hypothetical example used for illustrative purposes only. It is not representative of any specific investment or combination of investments.

1. FINRA.org, 2023
The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG Suite is not affiliated with the named broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Copyright FMG Suite.

Our latest discussion covered financial forecasting, the impact of tariffs, interest rates, and sector performance. Below are the key takeaways:

1. Macroeconomic Outlook & Forecasting

  • All insights were for educational purposes, not prescriptive financial advice.
  • Forecasts should come from diverse sources since markets price in expected corporate earnings and macroeconomic factors.
  • The current administration and global economic shifts play a role in shaping market trends.
  • (https://www.schwab.com/learn/story/us-stock-market-outlook)

2. Sector Performance Insights

  • The tech sector had an outstanding year, but heavy AI investments are straining profitability.
  • Rising energy costs for data centers and global environmental concerns could impact long-term growth.

3. Tech Sector & S&P 500 Analysis

  • A few large stocks drove much of the S&P 500’s gains.
  • There are concerns about overvaluation and potential pullbacks, particularly after consecutive 20% annual gains.

4. Diversification Strategy

  • Given the likelihood of uneven sector performance under the current administration, diversification remains critical for managing volatility.

5. Tariffs & Their Effects

  • Interest rate forecasts and potential tariff changes were key topics.
  • Tariffs could lead to short-term inflation as importers pass higher costs to consumers.
  • While tariffs may temporarily raise prices, businesses often find ways to adjust within months.

6. Interest Rates & Housing Market Trends

7. 401(k) to Roth IRA Conversions

8. ESG & Environmental Factors

  • Some ESG-related incentives are being rolled back, but sectors like electric vehicles remain strong due to corporate investment in sustainable technologies.

Securities and Advisory Services offered through Harbour Investments, Inc. Member SIPC & FINRA.

Join us for the next Ask Triangle!

Market Updates.

  • We’ve been encouraged by recent economic forecasts and numbers that indicate a softer overall inflationary impact.
  • The unemployment rate fell to 3.7%, and U.S. nonfarm payrolls rose to 199,000 in November, a slight increase from the payroll gain of 150,000 in October.
  • The November Consumer Price Index (CPI) increased by 0.1% over last month and is up 3.1% from a year ago. Wholesale prices remained unchanged in November, which is also an encouraging inflation indicator.
  • As we approach 2024, there is some optimism in the housing market — even though housing prices are still high and supply is difficult, the average 30-year fixed mortgage rate declined to 7.07%, the lowest rate since July. Over the past week, mortgage applications increased by 7.4% and refinance applications increased by 19%.
  • In the December meeting, the Federal Reserve opted not to raise interest rates, remaining within the 5.25%–5.5% target range. Projections released by the Fed indicate an expectation of four rate cuts in 2024, aiming for the goal of a 4.6% rate by the end of 2024.
  • The Fed also shared an encouraging core personal consumption expenditures price index (core PCE) forecast indicating a decline of 2.4% in 2024 and 2.2% by 2025 to reach their 2% target in 2026. Previous forecasts indicated a decrease of 2.6% in 2024 and 2.3% in 2025.
  • We are wishing you a very Happy Holiday season and a prosperous New Year!

Sources

 

Join us for the next Ask Triangle!

Securities and Advisory Services offered through Harbour Investments, Inc. Member SIPC & FINRA.

Market Updates.

  • While we have observed some unexpected fluctuations in the economy recently, they don’t appear to be extreme, and the economy remains resilient and strong.
  • The Bureau of Labor Statistics October report showed a cool down as U.S. nonfarm payrolls only increased by 150,000, less than expected, while the unemployment rate rose to 3.9%.
  • The October Consumer Price Index, which measures consumer price changes over time (excluding food and energy) was lower than anticipated with a two-year low of 4%.
  • This month, the U.S. 10-year Treasury yield fell by almost 9 basis points, and the 2-year Treasury yield has fallen nearly 10 basis points.
  • We saw an 0.8% decrease in import prices, along with a 0.5% decline for the Producer Price Index in October, the biggest drop since April 2020.
  • Although the Federal Reserve opted not to raise interest rates in October, and it is encouraging to see the pace of inflation begin to slow, the Fed is still committed to enforcing a restrictive monetary policy through rate increases to achieve a decreased 2% inflation rate.
  • Despite decreases in the jobs market, the potential slowing of inflation and interest rate hikes encourages us. No matter what, we won’t leave your financials up to chance or wait to see what the market does tomorrow. The Triangle Financial team always takes a long-game perspective, so you can rest assured we keep your future security in focus.

Sources

 

Join us for the next Ask Triangle!

Securities and Advisory Services offered through Harbour Investments, Inc. Member SIPC & FINRA.

Market Updates.

Overall, the U.S. economy continues to be resilient.

  • Recent market fluctuation may be linked to the September jobs report, which was unexpectedly positive. Payrolls and hourly earnings increased, and the unemployment rate is slightly lower than expected. Job growth continues in the leisure and hospitality industries.
  • Although the Federal Reserve didn’t raise interest rates in September, we still anticipate additional rate increases before year end.
  • Consumers are selling out of long-term treasury bonds for liquidity, which makes sense with the 10-year treasury yield climbing to 4.88%. This is close to the level it was prior to the 2008 financial crisis.
  • Economists continue to push out the timeline for when a recession could occur. That, combined with the fact that the only thing that’s been consistent with the market is that it’s unpredictable, means we can’t forecast for certain how the market will perform tomorrow.
  • At Triangle Financial, we focus on a long-game perspective. Instead of making decisions based on what we think may happen tomorrow, we plan according to what we know right now. That way, you can rest assured that we are always keeping our eye on your future financial security.

Sources

Join us for the next Ask Triangle!

Securities and Advisory Services offered through Harbour Investments, Inc. Member SIPC & FINRA.

A company’s profits can be reinvested or paid out to the company’s shareholders as “dividends.”

When looking for income-generating investments, some investors turn to dividend-yielding stocks.

When a company makes a profit, that money can be put to two uses:

  1. It can be reinvested in the business.
  2. It can be paid out to the company’s shareholders in the form of a dividend, a taxable disbursement typically made quarterly or monthly.

Dividend Ratios

Investors track dividend-yielding stocks by examining a pair of ratios.1

Dividend per share measures how much cash an investor is scheduled to receive for each share of dividend-yielding stock. It is calculated by adding up the total dividends paid out over a year (not including special dividends) and dividing by the number of shares of stock that are outstanding.

Dividend yield measures how much cash an investor is scheduled to receive for each dollar invested in a dividend-yielding stock. It is calculated by dividing the dividends per share by the share price.

Other Dividend Considerations

Investing in dividend-paying stocks can create a stream of taxable income. But the fact that a company is paying dividends is only one factor to consider when choosing a stock investment.

Dividends can be stopped, increased, or decreased at any time. This is unlike interest from a corporate bond, which is normally a set amount determined and approved by a company’s board of directors. If a company is experiencing financial difficulties, its board may reduce or eliminate its dividend for a period of time. If a company is outperforming expectations, it may boost its dividend or pay shareholders a special one-time payout.

When considering a dividend-yielding stock, focus first on the company’s cash position. Companies with a strong cash position may be able to pay their scheduled dividend without interruption. Many mature, profitable companies are in a position to offer regular dividends to shareholders as a way to attract investors to the stock.

Qualified dividends are taxed at a maximum rate of 20%. Ordinary dividends are taxed at the same rate as federal income taxes, or between 10% and 37%. State income taxes also may apply.2

Be cautious when considering investments that pay a high dividend. While past history cannot predict future performance, companies with established histories of consistent dividend payment may be more likely to continue that performance in the future.

In a period of low interest rates, investors who want income may want to consider all their options. Dividend-yielding stocks can generate taxable income, but like most investments, they should be carefully reviewed before you commit any dollars.

Keep in mind that the return and principal value of stock prices will fluctuate as market conditions change. And shares, when sold, may be worth more or less than their original cost.

The information in this article is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation.

1. Investopedia.com, February 6, 2023
2. Investopedia.com, May 26, 2023
The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG Suite is not affiliated with the named broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Copyright FMG Suite.
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