Filbrandt Reports

How to Prepare Portfolios for a Possible Downturn

Volume 18, Issue 19



Executive Summary:

In this report, you will learn:

  • Many university professionals we serve don’t monitor their retirement portfolios closely
  • Factors that are converging to make the possibility of a downturn more likely
  • What “rebalancing” your portfolio means and why it is a very important step to take now
  • Why bonds might not be as safe as you might think
  • The difference between retirement and what we call financial independence

Managing your own investment portfolio can be scary at times. The stock market continues its long bull run, but even so, many of our clients in academia are concerned about the possibility of a downturn. Some say that’s one sign that the market will likely continue to go up, at least in the short term, because they say the market climbs a wall of worry.

Now is the time for university professionals to prepare their portfolios for the possibility of a downturn in the stock market, due to a confluence of factors:

  • Market volatility is increasing after years of below-average volatility;
  • We are in the midst of a nine-year bull market that is the longest in U.S. history;
  • The Fed has been raising interest rates, which historically coincides with the beginning of the end of a bull market;
  • The current political environment is extremely volatile and could affect the market in the future.

Set Up a Process to Rebalance Your Portfolio on a Regular Basis

Now is a very good time to take a look at your portfolio and, in particular, the level of risk within the portfolio. Many people we talk with have some idea of their portfolio allocations, but they don’t monitor it closely. When the market is performing well, most people usually don’t worry about their portfolios.

With the gains in the stock market in recent years, it’s possible you have too much stock in your portfolio. The problem with not monitoring your portfolio is it can get out of balance. As the value of stocks and other equities increases, so does the percentage of volume they represent in a portfolio that also contains “fixed income” assets such as bonds. A portfolio that was close to 50-50 in terms of equities to fixed income when the bull market began would be lopsided now in terms of equity volume and risk if it has not been rebalanced.

Now is a good time to set up a process to rebalance your portfolio on a regular basis. Rebalancing helps keep portfolio risk at a level appropriate for your situation.

How to Prepare Portfolios for a Possible Downturn

How to start:

  • Determine your ideal asset allocation, and use it as the basis for the following process, which you should do at least annually
  • Determine your portfolio’s current asset allocation
  • Buy and sell assets to achieve the desired asset allocation

A portfolio heavily weighted in equities contains a much higher level of risk than we recommend for most people approaching retirement, because equities can fall in value just as quickly as they increased. For example, in 2008 and 2009, the CREF stock fund and some major stock indexes were down greater than 50 percent. Portfolios that were heavily weighted toward stocks at that point in time and not rebalanced lost up to half of their value.


The time to rebalance your portfolio is now

While the market is at all-time highs and prior to a potential downturn is a great time to rebalance. You can capture gains by selling some stock, then use the proceeds to rebalance the portfolio and achieve a level of risk that you feel more comfortable with.

If you are rebalancing your own portfolio, you need to be cautious.  In the past, the primary investment category people have turned to for safety and diversification from the stock market has been bonds, and we’re seeing more risk in bonds as interest rates rise. Most people don’t understand that when interest rates go up, the value of bonds goes down – and vice versa. That relationship never changes.

Most of the universities we work with offer tools other than bonds that can help diversify a portfolio. Examples include TIAA Traditional, TIAA Real Estate, Valic Fixed Account, Minnesota Life General Account, or other stable value funds that are characterized by less volatility and risk than equities. Evaluating and learning more about these types of investments could be crucial for your portfolio.

A review of your portfolio is particularly important if you’re getting close to what we refer to as financial independence, the point in your life when you can maintain your current or even an enhanced lifestyle with your retirement income doing the necessary work, not you. It’s the point when you can retain or attain the lifestyle you choose without having to rely on a paycheck. This is different from retirement in that you don’t have to set a date on the calendar when it will take effect. Once you achieve financial independence, you are in charge of the timetable. Part of the path toward financial independence is assessing your own situation. How many years away are you from wanting to be independent? If you’re five to ten years from retirement or closer, consider heeding the advice offered in this report. Most people need a catalyst to start the process, and the headlines of recent weeks and months have served as that for many of your colleagues. If you want to review your portfolio, give us a call at 800-431-9740, or schedule an independent, no-obligation 15-minute phone consultation.


Volume 18, Issue 19

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