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Thinking of Changing Your Portfolio Strategy? Read this First

Posted by Michael J. O'Connor | CWS®, Vice President Investments
September 1, 2015

The last few years have been fairly “steady as she goes” for the U.S. stock market—the bull market had gone over 1,400 calendar days without a 10% correction, which marked the third longest such streak in half a century.1 But that changed very quickly from August 18 – 25, when the market fell over 11% in just six trading days.2 The steepness of the drop and its rapid onset left many investors concerned, perhaps even wondering if this was the beginning of another prolonged downturn like 2008.

If you’re considering making changes to your portfolio out of concern over the volatility, or for one of the four reasons below, we’d encourage you to take a moment to gain some perspective before making a big change. If your long-term goals have not changed, but you are considering making significant changes to your asset allocation, there is a chance emotion may be getting in the way. 

Are You Considering Portfolio Strategy Changes for Any of These Reasons?

1) The Market is Way Overpriced – since the market has been trending higher for about six years now, it is reasonable to wonder if maybe it has gone up a little too much. One indicator commonly used to measure a stock’s value is its P/E ratio. In general, the higher the P/E, the more ‘pricey’ a stock is thought to be. As you can see below, the forward P/E currently sits around 16.6. While a bit higher than the average since 1990 (15.7), it is not nearly as high as it was in the late 1990’s, when stocks were still performing well.

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2) The Market Correction is Bigger than Usual – Sometimes a correction may give you a feeling that “this time it’s different.” But the reality is that stock market corrections are quite common—the average intra-year drop for the S&P 500 since 1980 has been -14.2%, and as you can see below we have not experienced a decline in that range since 2011. In other words, so far this market correction looks fairly normal from a historical perspective.

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3) If the Fed Raises Interest Rates, It’s Going to End the Bull Market – history tells us that a Fed interest rate hike—or a series of hikes—does not necessarily spell doom for the stock market. In fact, the market has done quite well in the past as the Fed has entered rate hike cycles.3

Porfolio_Stategy_Interest_Rate_Hikes

4) Earnings Have Been Declining Lately and are Expected to Decline More – the general feeling that China is slowing and that the global economy is in somewhat of a weakening state may nudge investors to think earnings could be adversely impacted as well. But recent data from JP Morgan actually expects earnings to grow over the remaining quarters of this year, which could bode well for stocks. 

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Talk to a Wealth Manager about Your Asset Allocation

At the end of the day, if you are still thinking of changing your portfolio strategy—or you are wondering if your asset allocation may need shifting based on your goals—you can give one of our Wealth Managers a call and we would be happy to discuss that with you. While past performance is not necessarily indicative of future results, we would happily answer any questions you may have about the market outlook, given the increased volatility of late. Give us a call at 1-800-541-7774 or contact us here.

 


Sources:

1. JP Morgan Guide to the Markets

2. USA Today

3. JP Morgan Market Insights

 

Portfolio Strategy

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