2023 is poised to deliver a tricky environment for investors, characterized by economic uncertainty and heightened volatility amid a complex global backdrop.
Here we share six tips for getting through today’s challenges while progressing toward tomorrow’s goals.
1. Broaden your view of diversification. For many decades, a 60/40 blend of publicly traded stocks and bonds was enough to deliver healthy portfolio diversification; however, things are different in our current environment as correlations tick up between many public asset classes.
Today, the market for privately held alternative investments — in sectors such as real estate, infrastructure, and commodities — is growing in size and importance. By expanding your reach beyond publicly traded securities, you may be able to access uncorrelated investments with attractive risk-return characteristics. At Trion Properties, for example, our Multifamily Opportunity Fund IV offers accredited investors private equity exposure to a diversified portfolio of multifamily real estate assets.
When considering alternatives, manager selection is especially critical given the wider dispersion of returns for private managers compared to public managers. Consult with your team of experts to identify managers with strong track records of superior risk-adjusted returns through a full range of economic conditions.
2. Think carefully about concentration risk. Concentration is the opposite of diversification — and it can creep into your portfolio inadvertently. A well-diversified portfolio free from heavily concentrated positions can provide stability in an uncertain environment.
Concentration arises from multiple sources. You might have a large position in a current or former employer’s stock because of an equity compensation plan. Or, you might be feeling the “denominator effect” after many asset classes posted significant losses last year. One portion of your portfolio may have significantly decreased in value, pulling down the total value of your portfolio — and now, another segment of your portfolio represents a larger proportion of the overall portfolio than before. Take a close look at the slices of your current portfolio pie. Are any of the exposures too concentrated for your risk appetite?
3. Appreciate volatility as the new normal. Information is moving faster than ever before — and financial markets are, too. Fueled by algorithmic and high-frequency trading along with growing retail investor participation, the trend toward heightened market volatility is likely here to stay.
While bigger and more frequent price swings can feel stressful, try to see volatility as a potential source of long-term investment opportunities instead of something to be avoided altogether. Investing consistently and focusing on time in market — not timing the market — can help you generate consistently strong results, even when conditions are choppy.
4. Clarify your goals, risk tolerance, and risk capacity. Having the right plan in place is key to being able to confidently ride out market ups and downs in an uncertain economic environment. Make sure your investment portfolio reflects your unique financial situation as well as your goals and time horizons.
Consider both your risk capacity — an objective assessment of the level of risk you can accept to achieve your financial goals — as well as your risk tolerance, which is related to your emotional willingness to take on risk and endure losses.
5. Stay in touch with your team of professional advisors. Financial, tax, and legal experts can help you understand what you own and how it maps to your goals. These professionals can also identify ways for you to keep more of what you earn by deploying tax planning tactics year-round.
During down markets, for example, your team can help you use losses to reduce future tax bills, a strategy known as tax-loss harvesting. Or, if you own real estate, your advisors can help you determine whether a 1031 exchange could help you defer capital gains taxes. They can also guide you on how to maximize charitable giving and manage contributions to tax-advantaged accounts.
6. Cash isn’t always king. In times of uncertainty, it can be tempting to pump up your allocation to cash — but hoarding a big pile of cash for long periods of time can backfire as inflation eats away at its real value. Make sure your cash position isn’t undermining your progress toward long-term goals.