Managing Your Portfolio
Some managers prefer to add flair to portfolio management by taking unnecessary risks. Simply put, that’s not our approach. We utilize a diversifying approach to manage your portfolio, supported by a team that purposefully applies continuous monitoring, rebalancing and tax management. This is done with significant discipline—regardless of market, economic or political news.
Our strategy may sound boring—but we prefer it that way. We never buy-and-forget. We strive every day to deliver fewer surprises and more support as we take control of your portfolio together.
Managing the Emotions of Investing
As you start your investment journey with your advisor, you’ll likely feel excited for the future. As markets oscillate, however, we know many investors experience emotional cycles. Even the best investment strategy is moot without the discipline and conviction to stay invested through rough market patches.
That’s why we say good investment outcomes come from marrying a good strategy with predictable behavior. This is done to anticipate some of the inherent emotions—from excitement to fear to relief—coming from market cycles that can otherwise affect better decisions.
The Roller Coaster of Investor Emotions
Preparing for the Rough Patches
At the beginning of our journey together, we set an investment objective that will guide how we respond to different market environments. Because, as history shows us, market declines are not uncommon.
The chart demonstrates that, despite the frequency of market hiccups, a long-term perspective highlights the potential benefit of staying invested. We plan for market declines, because we know that, on average:
- One in every three months, stock markets lose value
- Every eighteen months, stock markets decline by 10 percent or more, which is generally considered a market correction
- Every four years, stock markets decline by 20 percent or more, which is generally considered a bear market
At Focus Partners, we stick to the evidence. We don’t make frequent changes to your portfolio based on short-term events. These events matter, so we’ve planned for their shocks. It’s part of our strategy and another reason we’re firm believers in diversification—to help manage for and withstand short-term rough patches, keeping you on track to meet your long-term goals.
Disclosure
Data for the U.S. Market declines from the Ken French Data Library. U.S. Market is a value weighted return of all CRSP firms incorporated in the U.S. and listed on the NYSE, AMEX, or NASDAQ. Over the 97-year period from January 1927 through December 2023, U.S. stocks had an intra-year decline of 20% or more 25 times, which is roughly once every 4 years. U.S. stocks had an intra-year decline of 10% or more 65 times, which is roughly once every 18 months. U.S. stocks were down 433 of the 1,164 months over that same period, or slightly more than once every 3 months. Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio nor do indices represent results of actual trading. Information from sources deemed reliable, but its accuracy cannot be guaranteed. Performance is historical and does not guarantee future results. Index total return includes reinvestment of dividends and capital gains.
Chart provided by Dimensional Fund Advisors. The latest version can be found at https://www.dimensional.com/us-en/insights/market-returns-through-a-century-of-recessions.
Returns are presented in US dollars. Stock returns represented by US market return, provided by Ken French Data Library. This value-weighed US market index is constructed every month, using all issues listed on the NYSE, AMEX, or Nasdaq with available outstanding shares and valid prices for that month and the month before, and excludes American depositary receipts.
The growth of wealth shows the growth of a hypothetical investment of $100 in the US stocks from July 1926 through December 2022. Data presented in the Growth of Wealth chart is hypothetical and assumes reinvestment of dividends and capital gains and assumes no transaction costs or taxes.
For illustrative purposes only. Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. The indices do not represent results of actual trading. Performance is historical and does not guarantee future results.
Gross Domestic Product (GDP) based on quarterly data from the US Bureau of Economic Analysis; quarterly data not available prior to 1947. Percentage change in GDP based on business cycle peak to trough quarter as reported by National Bureau of Economic Research (NBER).
Industrial Production, Inflation, and Unemployment based on monthly data from Federal Reserve Bank of St. Louis (FRED); Unemployment data not reported prior to 1929.
Information from sources deemed reliable, but its accuracy cannot be guaranteed.
Keeping Your Portfolio in Balance—So You Can Focus on What Matters
Markets move every day–that’s expected. Our job is to monitor your portfolio year-round to ensure that it stays in-line with your tolerance for risk.
- As your portfolio moves out of balance, you’ll see us sell some of what’s done well and buy some of what’s done poorly.
- We call this rebalancing, and it enforces a discipline of buying low and selling high.
- If stocks have done well and have grown over pre-defined target values, we may sell stocks and buy bonds to keep your overall portfolio risk aligned.
Discover how rebalancing can manage risk.
The Process of Rebalancing
Rebalancing to Manage Risk
Stocks tend to grow faster than bonds, so left unchecked your portfolio can gravitate towards having proportionally more money invested in companies than agreed to in the context of your Investment Policy Statement. Over time, this can add up and increase risk. Without rebalancing, an increasing allocation to stocks may expose you to bigger losses during market downturns.
Disclosure
Source: Ken French Data Library, Morningstar Direct 2023.
The chart shows the allocation to stocks for two portfolios to demonstrate that, over time, not reblaancing can lead to having relatively more money invested in stocks than originally targeted. Both portfolios start with the same allocation with 36% in U.S. Stocks, 18% in International Stocks, 6% in Emerging Markets Stocks, and 40% in bonds. The Portfolio with No Rebalancing is not rebalanced over the entire 30-year period. The Portfolio with Rebalancing follows a rebalancing rule where all portfolio asset classes are rebalanced to the target allocation when either major asset class (stocks or bonds) deviates more than 5% away from the target weight.
U.S. Stock returns are represented by the total U.S. market return, from the Ken French Data Library. International Stocks are represented by the total developed international market, from the Ken French Data Library. Emerging Market Stock returns are represented by the total emerging market, from the Ken French Data Library. Intermediate Government Bonds are represented by the Ibbotson Associates U.S. Intermediate Government Total Return Index Index from the Stocks, Bonds, Bills, and Inflation (SBBI) data, from Morningstar.
Turning Losses into Tax Breaks
Sometimes investments lose money. In fact, some may be worth less than what you bought them for. Yet, these can be used to help offset gains and limit taxes. This is known as tax-loss harvesting and its benefits are key to our ongoing strategy:
- Identifies and replaces losing assets
- Locks in losses to offset taxable gains
- Keeps the portfolio in-line with targeted allocation
- Can reduce overall tax burden
Combine Gains
With Losses
Reduce or Eliminate Tax Bill
See how tax-loss harvesting adds up during volatile markets.
The Silver-Lining to Market Volatility
During volatile markets, investments may experience severe turbulence, even losses. When this happens, we use Tax-Loss Harvesting to sell holdings trading at a loss, replacing them with similar but not identical investments. The losses on these trades can be used to offset other capital gains—potentially reducing either current or future tax bills.
Illustrated here, this can result in higher tax breaks during periods of market downturn, reducing some of the impact of volatile markets. This can be done across stocks, bonds and alternatives.
Hypothetical Tax Break Scenario
| Taxes | Initial Investment | Investment declines 20% | Investment gains 40% | Balance | Cost Basis | Tax Offsets | |||
|---|---|---|---|---|---|---|---|---|---|
| No Tax Loss Harvesting | $100,000 | → | $80,000 | → | $112,000 | $112,000 | $100,000 | $0 | |
| With Tax Loss Harvesting | $100,000 | → | $80,000 | → | $112,000 | $112,000 | $80,000 | $20,000 | |
|
↑ ↓ Tax Loss Harvest Sell the initial fund Realize $20,000 Capital Loss Buy a similar fund |
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Changing Your Portfolio as Your Life Changes
Life isn’t linear. That’s why, as we monitor your portfolio, we also review your plan and financial goals.
Based on your circumstances, the likelihood you will be able to meet and exceed your goals may change. As a result, we may recommend adjustments, such as savings and spending changes, to maintain a healthy probability of future success. To do this, we analyze and test the potential impact of these changes on the long-term viability of your portfolio, helping to maintain its value longer as you go through retirement.
We don’t frequently suggest changes to your portfolio. But, as your situation changes and your goals evolve, we will evaluate the impact on your plan together.
See How Different Life Changes Can Affect the Probability of a Successful Outcome
Managing Your Financial Future
As we study the financial landscape, we’re constantly observing the economic drivers and market events that impact us—keeping you informed at every step.
We don’t try to outsmart the market using tactical shifts or other trendy strategies. We design portfolios to be resilient to a variety of market environments. But this portfolio is just the beginning of our journey together. We work with you to constantly align your plan to your portfolio, using your Investment Policy Statement as a roadmap and guide.
Talk to your advisor to learn more about our approach to managing portfolios successfully.
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