Should You Adjust Your Portfolio for 2021 Market?

I think it’s safe to say at the beginning of 2021 nobody would have expected to be sitting here in November 2021 discussing the stock market that is up over 20% for the year. Now, nobody needs to look further than December of 2018 to see the markets can turn the other direction quickly. But when the market has a better than an anticipated year, we want to look at two different things to consider in that environment.

I often joke with my clients that my crystal ball is out for repair and unfortunately it’s been out for repair for a while. It probably would have come in handy this year, though I’m not sure even it would have anticipated the kind of year that we’re having. Beginning of 2021, the pandemic was still ongoing, and it’s still ongoing today. Throughout the year we heard different talk about changing tax legislation along with other pieces of legislation. And there are still parts of this economy that haven’t really received from the pandemic. So many people are surprised to see the markets where they are at. And so this first idea we are gonna talk about – don’t panic – highlights that point a little bit.

1. Don’t Panic

Before we start talking about what’s on this slide, I do want to reiterate that while we want to avoid panic buying when the market is high, I’m not saying we shouldn’t necessarily buy different points in the market – even when it’s high. Depending on your time frame for investing, when you are going to need the money, it could still make sense to invest at different points of the market – even when it is high. What we want to avoid is the idea of panic buying, where we are afraid of missing out on something – the old adage of FOMO. So we dump money in the market at a time when it’s not best for you based upon your situation.

So if we look at this chart here, the bottom one is what I’m going to focus on. It says 20 year annualized returns for different areas of the market from 2001 to 2020. What you will notice is the average annualized returns for the S&P 500 (or what many people would call the stock market) is 7.5%. Now that takes into consideration the tech bubble in the early 2000s, the housing crisis in 2009-2010. But if you just bought at the beginning of 2001 and held until the end of 2020, you would have averaged 7.5% per year in the S&P 500.

You can see various other asset classes, including a 60/40 portfolio, this would be 60% stock and 40% bonds; during that time period would have averaged 6.4%.

I want to highlight this one right here, this bar shows the average investor during that same time frame averaged 2.9%. Typically that’s because most investors tend to get caught up in the emotions of the market and they will buy at a high and sell at a low – which is exactly the opposite of what we want to try and do. That’s where the panic buying comes in; people feel like they are missing out on something and they want to buy into the market, and then they panic on the opposite side of that and sell out at the worst possible times. That’s how you end up with an average here of 2.9% rate.

2. Rebalancing Your Portfolio

The second point I want to reiterate is something I talked about before; I’ve written a more in-depth piece: Rebalancing is not a type of Yoga

We need to make sure we are rebalancing your portfolio. Especially in a year when the market has done better than anticipated, sometimes it’s a little easier to get lackadaisical with the portfolio and not stay disciplined with it. So we are gonna take a look at what rebalancing does to a portfolio and the effect it has on the long-term performance of your portfolio.

So one of the benefits of working with Stewardship Advisors is this idea of rebalancing; it’s something that we do automatically for our clients. Anybody that we manage money for we do quarterly rebalancing to the portfolio, so we just take care of that for you.

So looking at this slide right here, what you are going to see is this idea that if we start with a 60% stock and 40% bond portfolio, over time depending on how different pieces of the portfolio perform, the pie chart could look very different.

Right here you will see in September 2001, if we would have started with 60% stock/40% bond portfolio, by 2007 because of the market returns, it would have returned to 65% stock and 35% bonds if we would have not rebalanced it at all. Forward to 2009 and the reverse happened: we had a big drawdown in the market during that time period and so that 65% stock dropped to 54% stock. By September 2021 that 54% would have grown to 80% stock and 20% bonds.

What this does is for someone who wanted to be 60% stock and was comfortable with that level, if you didn’t go in from time to time and rebalance the portfolio or sell off the things that did well and buy the things that are underperforming to get back to the initial starting allocation, you are gonna end up with a lot more risk than what you feel comfortable with. So the next time the market corrects, you are now going to potentially experience a bigger drawdown because you are starting with a much higher risk level.

So rebalancing the portfolio is not necessarily about maximizing returns, as we will see on this side of the chart. In this particular chart, the dark shaded bar shows that over a 20 year period, a 60/40 portfolio (with annual rebalance – that means at the beginning of each year, you went in and if it were 65% stock, you sold 5% to bring it to 60%) you would have averaged a 7.8% return over that same time frame of 20 years. Now, if you just bought 60/40 in 2001 and never touched the portfolio, let it grow to 65 or back down to 54, you would have actually averaged a slightly higher rate of return at 7.9%. The real difference comes in what’s known as the Standard Deviation, which is what they refer to as the risk of the portfolio.

So the larger the standard deviation, the larger the swings you are going to experience in the portfolio.

So for a portfolio that’s rebalanced annually, the standard deviation is 8.5%, versus one that was never rebalanced, the standard deviation is a little over 9%. So you are picking up just a slightly better rate of return by about 1/10 of a percent, but you are increasing the risk by almost half a percent. So most people wouldn’t feel comfortable with that kind of a risk/reward tradeoff, just because the portfolio is going to swing higher and lower and it could be swinging at a time for you that you need to draw money from it, but we have now drawn down a little harder than anticipated. So rebalancing really helps with this idea of keeping it to the appropriate risk, based upon your situation and when you are going to need the money in the future.

Need Help Balancing Your Portfolio?

These are just two of the ideas we are talking about with clients this year, as the markets have had a pretty good return so far.

If you have any questions about this information or would like to discuss how it relates to your situation, please don’t hesitate to reach out via phone or email. We would be happy to discuss it with you further.