Advice & Research
Gregory Teets, Director of Markets & Portfolio Advice
David Furst, Portfolio & Advice Strategy
It’s That Time: Year-End Portfolio Actions
Classically, the end of the year is a time where we evaluate “how things went.” If we summarize 2020 with one word, what would it be? Unusual? Chaotic? Weird? The ongoing global pandemic has resulted in significant changes in working, shopping, and learning patterns; market volatility and a nagging uncertainty about the road ahead. As investors, we believe that it is critical to maintain a long-term perspective and keep a close eye on our portfolios. With that natural tension in mind, there are three actions to consider as the year comes to a close: reassess your risk appetite, review your goals, and rebalance your portfolio. To inform the discussion, it is helpful to keep in context the market’s performance over this past year; a year filled with uncertainty should be measured accordingly.
2020 Market Performance and Volatility
Reassess your risk appetite
Mike Tyson famously said, “Everybody has a plan until they get punched in the mouth." We think the same concept applies to risk appetite: Investors may believe they have a large risk appetite until their portfolio gets “punched”. Mr. Tyson isn’t saying that training is purposeless, but rather describing the shock that occurs when a hard hit lands. Like many professionals, boxers train for a big event. They spend hours honing their form, building endurance, and sparing with mock opponents. Investors should do the same by evaluating their current asset allocation (form), security diversification (endurance) and stress testing (mock opponent) their portfolio. Further, like athletic training, it is an ongoing process not a once in a while event.
Leveraging a powerful platform, RAPTR® (Risk Analysis and Portfolio Testing Review) can help assess how a portfolio may absorb blows from a wide range of hypothetical market events. RAPTR® can illustrate the hypothetical impact of certain stress test scenarios to assess a portfolio’s resiliency. With a better feeling for what could happen, the analysis can provide a gut check for your risk tolerance and help you stay invested even in adverse market conditions. The review offers securityby- security risk statistics, can illustrate the potential impacts of concentrated positions (single investments that make up a large portion of the total portfolio), and help uncover unforeseen risk in smaller positions.
Review your goals and expectations
2020 was chock full of surprise uppercuts with many pivoting to work from home, school at home, dine at home. As we near the end of an unusual year, we believe that it’s a perfect time to review your goals. To state it simply: Are your current goals accurate? Do they still reflect the when, what, and how? Using retirement as an example, does your plan still match when you would like to retire, what you would like to do during retirement and how you would fund it?
We believe it is also important to reassess your expectations. Once again, interest rates are at very low levels compared to their long-term averages, which means that returns on cash and short-term investments are small. In addition, equity market returns (as measured by the S&P 500) have been strong with results in the double digits 7 of the last 10 years with only one negative year. It may be appropriate to assume that portfolio returns will be less robust in the near future.
Rebalance your portfolio
Asset class performance is never spread evenly and 2020 is no exception. As a result, a properly aligned portfolio may have drifted away from its targets over the course of the year. In the figures below we illustrate the performance of the headline indices, as well as a few key diversification dimensions: market capitalization, and market sector. The year’s market performance has not impacted firms equally. Some industries have thrived while other have been dealt a blow in the face of COVID-19. As the year comes to a close, investors reflect on their portfolio’s performance and how that compares to their particular benchmark and the market overall. This review can critically inform what, if any, changes should be made.
Taking in to account stress test results, updated goals, and asset class performance, a portfolio rebalance may be in order to help avoid an unexpected blow from the market. As you are reviewing your portfolio with your Financial Advisor, consider the Wells Fargo Investment Institute’s recent guidance and expectations for the coming year.
S&P 500 Sector Performance through Oct. 2020
Index & Data Definitions
Index returns are not fund returns. An index is unmanaged and not available for direct investment. Past performance is no guarantee of future results. Index returns do not represent investment returns or the results of actual trading nor are they forecasts of expected gains or losses a fund might experience. Index returns reflect general market results, assume the reinvestment of dividends and other distributions, and do not reflect deduction for fees, expenses or taxes applicable to an actual investment. An index is unmanaged and not available for direct investment.
Dow Jones Industrial Average: The Dow Jones Industrial Average is a price-weighted index of 30 "blue-chip" industrial U.S. stocks.
NASDAQ Composite Index: The NASDAQ Composite Index measures the market value of all domestic and foreign common stocks, representing a wide array of more than 5,000 companies, listed on the NASDAQ Stock Market.
S&P 500 Index: The S&P 500 Index consists of 500 stocks chosen for market size, liquidity, and industry group representation. It is a market value weighted index with each stock's weight in the Index proportionate to its market value.
S&P Midcap 400 Index: The S&P Midcap 400 Index is a capitalization-weighted index measuring the performance of the mid-range sector of the U.S. stock market, and represents approximately 7% of the total market value of U.S. equities. Companies in the Index fall between the S&P 500 Index and the S&P SmallCap 600 Index in size: between $1-4 billion.
S&P Small-Cap 600 Index: The S&P SmallCap 600 Index consists of 600 domestic stocks chosen for market size, liquidity (bid-asked spread, ownership, share turnover and number of no trade days) and industry group representation. It is a market value-weighted index (stock price times the number of shares outstanding), with each stock’s weight in the index proportionate to its market value.
All investing involves risk, including loss of principal.
Important: The projections or other information generated by Risk Analysis & Portfolio Testing Review regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. Results may vary with each use and over time.
The investment(s) discussed may not be suitable for all investors. Investors must make their own decisions based on their specific investment objectives and financial circumstances. Additional information is available upon request.
Wells Fargo Investment Institute, Inc. is a registered investment adviser and wholly-owned subsidiary of Wells Fargo Bank, N.A. a bank affiliate of Wells Fargo & Company.
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