Broker Check

Know what you own – The importance of rebalancing a portfolio

| March 14, 2018
Share |

Know what you own – The importance of rebalancing a portfolio

The stock market has just completed a stellar year with the S&P 500 gaining close to 20% and we are coming out of the gates fast in 2018 with the S&P 500 index up over 4%. These are phenomenal returns and your personal portfolios are probably reflecting this strong market. The information technology sector has been a huge driver of performance of the market in recent years. We all hear about the FANG stocks (Facebook, Amazon, Netflix and Google) every time we turn to a financial news channel. At the end of 2015, the information technology sector comprised about 21% of the S&P 500 market cap. At the end of September, 2016 that weighting had increased to close to 24% through appreciation and any technology companies that may have been added to the index.

As the market rises and a specific sector accounts for an outsized percentage of those gains, it is a wise idea to check you’re portfolios to make sure you are not too overweight in a certain sector. Your 401K, IRA, individual accounts, mutual fund holdings and accounts you may have with an investment manager need to be balanced.

For example, one of the most popular ETFs for the S&P 500 index is the SPDR 500 Index Trust, ticker symbol SPY. The SPY roughly shadows the performance of the S& P 500 index. Looking a little deeper in to the individual stocks in the SPY we find that Apple, Alphabet (formerly Google), Facebook, Amazon, Netflix and Microsoft make up about 13.5% of the market cap. Also, looking at three very popular and highly rated mutual funds, the information technology sector accounts for between 28% to 43% of assets. Furthermore, if you look at the six stocks I mentioned earlier, they account for about 25% of the assets of those mutual funds on average.

The returns in the S&P 500 and these funds have been fantastic. But as we enter in to a new year, it is recommended to go through all of your portfolios and make sure that you are aware of what sectors you are exposed to as a whole. Owning several different mutual funds with a big overlapping of the same stocks should be avoided.

One other important point is you keep an eye on your bond weightings. If you have a risk tolerance that results in a portfolio of 60% equities and 40% bonds you may find that those weightings are out of balance as the equity market has risen roughly 35% over the last two years. If you have not re-balanced your portfolio you could have more equity exposure than you are comfortable with.

Come in to Chatham Wealth Management and we can perform a complimentary review across all of your portfolios.

Know what you own!

Share |