Interest rate concerns and new stock market leaders are spurring these investment portfolio changes

Interest rate concerns and new stock market leaders are spurring these investment portfolio changes

At some point in 2021 the pandemic will likely recede. With the global population less ravaged by Covid-19, expectations of an economic recovery are growing.

Peering into this post-pandemic future, financial advisers are taking steps to position their clients for a better tomorrow. Portfolio management requires constant review, but planning for a labor-market comeback and shifts in consumer behavior present unique challenges.

With U.S. stock markets near all-time highs, hopes for recovery are mixed with fears about overpriced equities on the precipice. By one measure, shares recently were more expensive relative to earnings than at any time since just before the 1929 U.S. market crash.

“If clients are putting new money into the market, we’re doing more dollar-cost-averaging because of where the market is today,” said Jennifer Weber, a certified financial planner in Lake Success, N.Y. “It gives clients peace of mind, especially if they are worried about how high the market is now.”

For long-term investors, stocks remain a likely source of gains even if short-term declines occur. So advisers are trying to find sweet spots within a frothy market.

Weber says that valuations are more attractive for value stocks after years of surging growth stocks. So her team is gradually reducing clients’ exposure to what she calls “blue-chip growth” offerings, such as familiar names in the technology sector, in favor of value stocks. “Risk and volatility on the growth side is hitting its peak,” Weber said.

To navigate volatile swings, advisers often look to bonds to stabilize a portfolio. But using bonds to capitalize on a post-pandemic recovery carries risks as well. Jon Henderson, a certified financial planner in Walnut Creek, Calif., expresses concern about skyrocketing global debt levels fueled by massive government spending.

“This could provide a rude awakening should we see a reverse from the last two decades of falling interest rates,” he said. “Many investors have never experienced a rising interest rate environment. People may not be prepared for that.”

To mitigate this risk for his clients, Henderson is considering a reduction in the average duration of fixed-income bonds in portfolios. This can present a challenge for some retirees or pre-retirees who prioritize a steady income stream.

“One way to gradually shorten the duration in a laddered portfolio is to hit pause and not replace maturing bonds with new, longer maturity bonds that would normally be purchased to continue the ladder,” he said. Short-duration bonds tend to be less sensitive to interest rate changes than long-duration bonds.

The Federal Reserve says it intends to hold its benchmark lending rate near zero through the end of 2023. But some advisers warn investors not to assume low rates will remain in place over that period.

“In actual practice, the Fed can fall behind the curve, play catch-up and be forced to raise rates faster than anticipated, especially if there’s overheating in the economy,” said Brian Murphy, an adviser in Wakefield, R.I.

He adds that soaring prices for base metals “could portend higher inflation,” along with huge spikes in commodity prices and even bitcoin.

In the rush to profit from the post-pandemic recovery, exuberant investors might take undue risk. Yet the cardinal rule of maintaining a rainy-day cash fund matters more than ever in this situation.

“Don’t forget about your six-month emergency fund,” Murphy said. While earning next-to-nothing on cash can lead investors to chase higher yields, he cautions that the risk can exceed the reward of slightly better returns.

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