Summer brings the heat but a lull in the stock market may leave you feeling cold.
“Historically, the summer months are a slow period in the stock market,” says Bradley Zucker, financial consultant and president of Safe Money Advisors in Las Vegas. “The market slowdown usually lasts until about Labor Day, or the end of August to early September.”
Many investors decide to sit out the market through the summer but doing so may cost you returns if stocks hold steady.
“The summer months have not had strong returns historically compared to non-summer months,” says John McDermott, chief investment strategist at Symmetry Partners in Glastonbury, Connecticut. But, when you consider returns for the S&P 500 index over the past 40 years, “a strategy of going away in May and investing in Treasurys and coming back to the S&P 500 in November earned a return of about 1 percent less compared to being invested in the index for the entire year.”
[See: 9 Health Stocks for Reliable Income.]
Riding out the market wave could pay off in the fall. In the meantime, a midsummer portfolio tune-up can help you make the most of the dog days.
Check the temperature on valuations. Stock valuations hit multiyear highs — and multiyear lows — in the first quarter of 2018 and it’s difficult to predict where they’ll go next. Looking at what’s influencing valuations over the summer could set you up for success the rest of the year.
“Where we are in the economic cycle after several rate hikes, it’s prudent to check valuations and not pay up for equities,” says Derek Green, wealth advisor at Titus Wealth Management in Folsom, California.
That’s particularly important with one to two additional rate hikes expected later this year, and more to come in 2019. Inflation is another concern.
Zucker says rising hourly wages and low unemployment levels indicate a strong economy, but they may be a preface to inflation. Together, “inflation and rising rates can impact volatility.”
If stock valuations in your portfolio drop below a level you aren’t comfortable with, it may be time to make a change, Zucker says.
Increasing valuations should also get your attention. “If valuation levels rise above what’s reasonable based on the level of corporate profits, interest rates and historical price to earnings ratio trends, that could lead to an increased market risk,” says Michael Sheldon, executive director and chief investment officer at RDM Financial Group at HighTower in New York. Checking valuation levels allows you to “avoid a situation that leads to too much risk and market volatility.”
Shore up your asset allocation. Midyear is a good time to review your core and non-core holdings and plug any portfolio leaks.
Steve Azoury, owner of Azoury Financial in Troy, Michigan, says the summer slowdown thinking could distract investors from their real goal of building wealth. Sticking to certain principles in summer can benefit you all year-round and well into retirement.
For Azoury, that includes investing systematically versus trying to time the market, buying stocks with a long-term view and making sure the placement fits the asset. For example, “don’t put tax-free bonds in a Roth individual retirement account that’s already tax-free.”
Zucker says the interest rate outlook is a strong reason to review your ratio of stocks to bonds, as “rising interest rates will drive values of interest-sensitive stocks and bonds down.” He says investors may want to turn more of their attention to growth stocks this summer.
[See: 7 High-Quality Dividend Stocks to Buy.]
“Growth stocks do not perform in wild swings as rates rise like dividend stocks tend to do,” Zucker says. He says that while companies like Facebook ( FB) and Amazon.com ( AMZN) might benefit from inflation and rising rates, utility and telecom companies that offer dividends like AT&T ( T) may flounder in the current rate environment.
Regardless of what happens with interest rates, remember to keep your risk tolerance in sight, says Michelle Matson, vice president at Matson Money in Scottsdale, Arizona. “An investor’s weighting of stocks to bonds or fixed income should be based solely on their risk tolerance,” she says, and rebalancing is the key to keeping your portfolio on-course.
Sheldon says a good rule of thumb is to ensure that your portfolio fits your intended allocation. If you initially aimed for a 60/40 mix of equities to fixed income and the market experiences a significant upswing, that could make you front-heavy on stocks. The question then becomes what to do about it and “the straightforward answer is to bring your asset allocation back in line with its originally stated allocation.”
Reap the tax loss harvest. December may be when you typically turn your attention to tax loss harvesting but Dana D’Auria, director of research at Symmetry Partners says it’s also something to consider in summer.
“Investors seeking to maximize tax efficiency should be looking at tax loss harvesting on a regular basis,” D’Auria says. Doing so may allow you to “be more incremental about harvesting, as opposed to doing it in one fell swoop at the end of the year and deviating dramatically from the intended asset allocation.”
Green says a good way to harvest losses is rebalancing to maintain diversification, while moving assets to a similar exchange-traded fund in the same sector so you still have exposure to the asset class you sold.
Remember to be mindful of the wash-sale rule when harvesting tax losses in the summer. Selling one security and replacing it with one that’s substantially identical within 30 days cancels out any tax benefit you’d enjoy from harvesting losses.
Review which sectors are poised to sizzle — or fizzle. In addition to looking at your overall allocation between stocks and bonds, you should also take a look at your sector line-up in summer.
Green says you may want to consider moving away from sectors that may have gotten crowded. “It’s important to move into sectors that haven’t seen a significant run-up this year,” adding that investors may also want to think about increasing their cash and short-term fixed income holdings.
Zucker says financial stocks may be a good choice this summer, given the latest interest rate hike. “Insurance and bank stocks tend to benefit most as rates rise,” he says.
Most importantly, take the long view to see what the market may bring after summer fades into the sunset.
[See: 9 Best Cheap Stocks to Buy Now Under $5.]
“As the economy continues to improve, investors’ portfolios should benefit as well,” Zucker says. On the other hand, if there’s a widespread sell-off your core nest egg needs to be protected. When you have more time to plan over the summer, it’s important to “make sure you have winning stocks and securities no matter if the market goes up, down or sideways.”
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4 Tips to Dodge Summer’s Portfolio Blues originally appeared on usnews.com
