Diamond Member Pelican Press 0 Posted March 26 Diamond Member Share Posted March 26 Stocks trade near records, but chances are your portfolio isn’t sufficiently protected from a fall Investors may be tempted to ride stocks’ tech-driven surge to new heights, but now might be time to think about the protective power of diversification. The S & P 500 and the Nasdaq Composite are up close to 10% in 2024, and just last week all three of the major averages set fresh closing records. Communications services and information technology are driving a sizable portion of the gains, up 16% and 13%, respectively, this year. “It is easy to get caught up in the mega-cap technology stocks, but investors have already forgotten the Nasdaq lost almost a third of its value in 2022,” said Charles NeSmith, a certified financial planner and portfolio manager at Tobias Financial Advisors in Plantation, Florida. “You have these few companies that are gobbling up market share and investors want to get behind that return,” he added. That’s where diversification comes into play: Exposure to asset classes that are not closely correlated to equities can help blunt the impact of a downturn in stocks. Consider that the iShares Core Growth Allocation ETF (AOR), which is split 60/40 between equities and bonds, had a total return of -15% in 2022. The AOR felt the impact of falling bond prices as interest rates rose, but it still fared slightly better than the -18% total return for the S & P 500. AOR 1Y line AOR’s performance over the past year A recent paper from Morningstar found that the correlation between an all-stock benchmark and other asset classes, such as high-yield bonds has been rising over the past 20 years. Diversification within a portfolio Over the long term, solid portfolio diversifiers against equities include U.S. Treasurys and agency mortgage bonds, Morningstar found. In times of turmoil, investors flee to Treasurys for safety, which boosts the prices of those bonds within a portfolio and can help offset declines in equities. Indeed, agency mortgage-backed securities are one way to offer investors some diversification in their portfolios, said Andrew Herzog, CFP and associate wealth advisor at The Watchman Group in Plano, Texas. “For those who need some fixed income, we have a defensive bond sleeve with short-term Treasurys,” he said. Mortgage-backed securities can work alongside that strategy, “so you can earn good returns from U.S.-backed entities, be it Treasurys or the agencies,” Herzog added. Investors hoping to incorporate mortgage-backed securities into their allocation may want to consider an exchange traded fund. For instance, the iShares MBS ETF (MBB) has a net expense ratio of 0.04% and a year-to-date total return of -1.24%. Vanguard’s MBS ETF (VMBS) also carries an expense ratio of 0.04% and a total return of -1.08% in 2024. Cash has also been a good diversifier, offering the lowest correlation against stocks over the past three years, according to Morningstar. Investors seeking a safe haven for some of their holdings will still find attractive rates on money market funds. The Crane 100 Money Fund Index has an annualized 7-day current yield of 5.14%. Among equities, utilities and energy have been the sectors that performed most differently from the broader U.S. market over the past few decades, the research firm found. Utilities are about flat on the year. However, the energy sector has had a resurgence and is up nearly 11% in 2024. Commodities have also helped diversify portfolios. “Because their prices mostly depend on the balance of supply and demand, they often show very low correlations with other classes,” wrote Morningstar portfolio strategist Amy Arnott, a co-author of the recent paper. “They can also be a useful hedge against inflation.” Looking outside the U.S. There’s also the matter of diversifying equity exposure outside of the U.S., which can offer some protection in the event of a broad decline in stocks stateside. “We generally like to diversify along geography lines,” said NeSmith. “We like having more international [exposure] in our portfolio for diversification. They are cheaper on a price-to-earnings basis versus the domestic market.” Indeed, Morningstar noted that last year its emerging markets index rose 12%, compared to an 18% gain for the Morningstar Developed Markets ex-US index. Stocks in developed markets have had the closest correlation with U.S. equities, while emerging markets equities are less correlated, the research firm found. ETFs that play on that theme include the Vanguard FTSE Emerging Markets ETF (VWO) , which has an expense ratio of 0.08%, and the iShares Core MSCI Emerging Markets ETF (IEMG) , with an expense ratio of 0.09%. VWO has a year-to-date total return of 1.33%, while IEMG’s total return for the ******* is 1.6%. This is the hidden content, please Sign In or Sign Up Breaking News: Investing,******* States,Morningstar Inc,Exchange-traded funds,NASDAQ Composite,S&P 500 Index,iShares Core MSCI Emerging Markets ETF,Vanguard FTSE Emerging Markets Index Fund ETF Shares,Vanguard Mortgage-Backed Securities ETF,iShares Barclays MBS Bond Fund,iShares Core Growth Allocation ETF,Investment strategy,business news #Stocks #trade #records #chances #portfolio #isnt #sufficiently #protected #fall This is the hidden content, please Sign In or Sign Up Link to comment https://hopzone.eu/forums/topic/7596-stocks-trade-near-records-but-chances-are-your-portfolio-isn%E2%80%99t-sufficiently-protected-from-a-fall/ Share on other sites More sharing options...
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