Diversification and Rebalancing Strategies for a Volatile Market (2020 Update)
The COVID-19 pandemic has had a significant impact on the investment world in the past six months, with US stocks recovering and bonds performing exceptionally well. As the Treasury and Federal Reserve's programs cause the deficit to balloon, diversification becomes crucial for investors during these uncertain times.
I hope everyone is healthy and has made it through this part of the virus unscathed. It has been a crazy six months for investors. In March, stocks were down by almost 40%. Since then, US stocks have recovered most of their losses.
Bonds, mainly US Treasuries, have done exceptionally well, benefiting from a fall in interest rates as investors rushed to safe investments.
Gold has hit an eight-year high of $1,779 as speculators have poured into what they hope will provide some protection if the virus causes significant economic dislocations.
To keep the recession from falling into a depression, the Treasury and the Federal Reserve instituted enormous programs. So far, they have helped the stock market recover faster than anyone could have imagined and kept us out of a depression.
However, these programs have caused the deficit to balloon to $3.7 trillion and the Federal Reserve’s balance sheet to top $7 trillion.
It is not clear if the Treasury or the Federal Reserve would have the stomach to drastically increase these programs if the economy faced a significant setback.
Surprisingly, even after all this, the stock market is expensive; we usually do not begin an economic recovery with stock prices close to all-time highs. But this is not a typical recession. Conversely, bonds are a less appealing investment with interest rates dropping.
The one somewhat attractive market is foreign stocks. They have underperformed U.S. stocks for over a decade and have recovered less quickly. If you own some and are frustrated by their underperformance, it might behoove you to keep them. If you do not own any, it may make sense to allocate a slice of your U.S. portfolio to them.
Diversification remains investors’ one free lunch. This is a good time to double-check yours, especially if you were uncomfortable with March’s downturn.
These are the opinions of Financial Advisor Tim Hayes and not necessarily those of Cambridge Investment Research. They are for informational purposes only and should not be construed or acted upon as individualized investment advice. Content provided via links to third party sites should not be considered an endorsement of content, which we cannot verify completeness or accuracy of.
Financial Advisor Tim Hayes
I’ve held an industry securities registration for 30+ years and am subject to SEC and FINRA oversight.
Most clients pay fee-only or an hourly rate. The size and complexity of the client’s wealth management and financial and retirement planning determine that fee.
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Tim has offices in Boston and South Dartmouth, Massachusetts. He’s licensed to handle securities in 8 states: Massachusetts, Rhode Island, New Hampshire, New York, New Jersey, Connecticut, Maine, and Florida.