Is Your Portfolio Balanced for a Market Recovery?

Does your portfolio take advantage of current market conditions?

Since the stock market crash of September 2008, most investors with significant portfolios have repeatedly reshuffled and redistributed their holdings in an effort to minimize losses. The chaos that has followed has resulted in many portfolios being significantly imbalanced and weighted in ways meant to deemphasize the stock markets. However, since March 2009 the market is up some 60% and it looks like this trend is likely to continue despite the lingering effects of recession on the nation as a whole.

The international nature of the recovery

The current market recovery is being driven primarily by international factors: the increase in U.S. exports as well as the successful stabilization of many foreign markets, which present better investment opportunities for domestic institutional investors. Even if the general economy remains sluggish or lapses back into recession in 2010, the markets seem poised to perform reasonably well since many leading companies are taking advantage of international opportunities to maintain their profitability.

Slower rates of return

Although the stock and bond markets both seem likely to continue gaining ground, most analysts agree that the growth will be much slower than it was before the crisis. For stocks, few are predicting a return to double-digit returns, with most estimates being placed in the five to six percent range throughout 2010. Similarly, it is predicted that the return rates for bonds will be in the range of three to five percent. U.S. Treasuries will probably do worse, along the lines of two to three percent.

Don’t forget the bonds

With stock markets doing so well in recent months, your portfolio may be somewhat tilted in favor of stocks. However, the slower growth projected for 2010 as well as the likelihood of more stock market volatility means that you should probably be giving bonds more weight in your portfolio. The emphasis should be on highly rated short- to mid-term bonds, ones that will mature within five years or sooner. Also, you should seriously consider Treasury Inflation-Protected Securities (TIPS) to minimize the potential effects of inflation on your holdings.

International alternatives to TIPS

For American investors, Treasury Inflation-Protected Securities are most accessible through TIPS bonds, but for some investors another method is to buy securities that are denominated in other currencies. All indicators suggest that the dollar will continue to decline in 2010. Losses resulting from the decline can be offset by investing in assets denominated in other major world currencies, especially the Euro. The European Central Bank appears to be committed to keeping the Euro strong and stable, so the Euro is a good hedge.

Keeping your portfolio properly balanced

A number of factors, including a decrease in U.S. exports and declining foreign investment, could lead to market losses in 2010. The savvy investor must be willing to reshuffle his or her portfolio as needed to maintain a profitable asset allocation structure. However, for the time being, it seems that the U.S. markets are likely to continue their overall positive performance, albeit at a slower pace than many would prefer. Therefore, it is prudent to ensure that your portfolio is arranged to take advantage of this.

Other recent posts by bryanh