Find balance with your portfolio ( July 1/20 )

During Uncertain Times:
Find balance with your portfolio. How have you reacted to the markets of late? In uncertain times, it may be tempting to take a conservative approach to help protect investments from the downside.
Selling all your stocks and holding cash is one alternative, though not practical for many investors. The potential capital gains tax consequences may be one reason this would be unpalatable. But more importantly, equity markets are largely unpredictable and cyclical in nature. 1 he risk of being out of stocks is, over trip long run, likely greater than the risk of owning them.

If the turbulence of the markets prompts you to want to take action, here are some constructive considerations when thinking of making adjustments to your portfolio:

Restoring Portfolio Balance If a particular holding dominates within a portfolio, there may be an opportunity to rebalance. We often think of rebalancing by selling appreciated shares; however, it’s not always necessary to sell a position in order to bring balance back in check. Rebalancing can be done by investing new capital in asset classes that are now underweight. This brings the added discipline of focusing on undervalued sectors or asset classes for new investment opportunities.

Upgrading or Switching Securities Certain companies or industries may offer greater stability and be better able to withstand these uncertain times. Companies with strong balance sheets, low debt and healthy cash flows may be better positioned to fund operations during difficult times. Buying into industries that are anticipated to be least affected by an adverse economic

climate, such as those in “defensive sectors” like consumer staples or healthcare, may help to shield against the downside because they serve consumers’ basic needs throughout every market cycle.

Finding Income As government treasury yields and interest rates have reached all-time lows, many traditional income-yielding investments may provide dismal returns. For investors searching for income, there may be suitable opportunities with equity investments. Certain quality, sustainable companies have a history of continuous dividend payments during market downturns. Care must be taken when determining which quality equities or funds have reliable dividend payout streams. However, during down market times, there may be an opportunity for continued dividend payouts while waiting for prices to rebound from depressed levels.

Dollar-Cost Averaging (DCA) — Down markets may represent opportunities for investors to put money to work for the longer term. In volatile times, a DCA program can help to separate the emotions associated with turns in the market from investing decisions. Buying at regular intervals, regardless of market conditions, has the potential to lower the overall cost of shares purchased, turning a downturn to your advantage.

Active Management — During bull market times, the virtues of active management are often largely ignored. Actively managed funds can offer benefits that may be particularly helpful in today’s uncertain markets. Professional managers are continuously adjusting to the changing environment, assessing the relative merits of each security and their risk/return potential on an ongoing basis, perhaps more rigorously than most individual investors. Funds may also offer wide diversification in holdings, helping to reduce portfolio risk.

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