Rebalancing Your Asset Mix

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Spring is here and my backyard is full of rabbits.  Many handily survived our mild winter and, yes, they are cute, but these are big bunnies.  I have lived in the same house for three decades now and have seen the ebb and flow of nature over the years.  In the past, we had more deer, turkey, hawks and groundhogs, as well as my neighbor’s outdoor cats.  About five years ago, a new housing development took away a lot of undeveloped land.  Since then, the wildlife has changed.  The deer are still around and, of course, the bumper crop of bunnies, but the other wildlife is seen less frequently, and my neighbor’s cats have died.  I suspect that the bull market in bunnies is due to the lack of natural predators to keep their numbers lower.  With bunnies up and hawks down, nature, at least in my little corner of the world, may need a bit of rebalancing.  Something similar is the exercise we perform when we decide to rebalance your account.

At the start of the process, we take a detailed look at the major asset categories.  We then compare their recent performance to how they have performed historically and how they are forecasted to perform going forward.  We use analytical software and independent financial sources to determine if we need to tweak our current mix of asset categories.  In our current rebalancing, we will be moving some money out of large capitalization stocks and adding more to small capitalization stocks.  Our international stock exposure is below what it would be if purely indexed based on market size, but it is still larger than many of our peers.  Valuation is another key factor and international stocks just look very inexpensive compared to US stocks, so we feel it is prudent to maintain exposure to those investments.  Today, with interest rates substantially higher and the economy slowing, we are increasing the quality of our bond holdings and extending the duration (think maturity or length) of our bond mix.  The investment landscape, like my backyard, is always changing and we must adjust.

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Let me give you a micro example.  Two of the biggest, most well-known stocks in the S&P 500 are Apple and Microsoft.  Those two stocks make up 13% of the size of the index.  That is pretty amazing when you consider that if the index were equally weighted, they would only be .4% of the index.  When I started in the market over 30 years ago, the biggest stocks in the index were GE, Exxon, and IBM.  They are good companies that still exist, but competition and time has passed them by and capitalism, like the ecosystem, is constantly evolving.  I suspect that within 10 years, Apple and Microsoft will still be good companies, but not the two biggest.  Some companies out there right now will surpass them as the economy grows and changes in the next decade.  A timely rebalancing of portfolios can capture the changes that are ongoing in the financial markets.

The stock and bond markets are off to a good start this year as you can see in the charts below.  Despite Fed rate hikes, bank scares and recession concerns, the US economy is adapting and changing to make the best of a difficult situation.  Even though inflation seems to be easing, there are always concerns out there.  The ongoing war in Ukraine, tensions with China and the looming US debt ceiling vote are issues that when resolved, should make financial markets feel more confident. Hopefully, the markets will continue to tip-toe through the various challenges and head higher throughout the year.  I’m trying to adapt to the bunnies, but my flowers and yard are starting to take a beating.  I may be investing in a feral cat this spring; just a little rebalancing to help out Mother Nature.  Have a great spring!

If you have questions about this information or your overall financial plan, call us today at 412-630-6000. Our experienced financial advisors are here to help.

Data Source:  Franklin Templeton – S&P 500 is represented by the S&P 500 Index, DJIA is represented by the Dow Jones Industrial Average, NASDAQ is represented by the NASDAQ Composite Index, Russell 2000 is represented by the Russell 2000 Index, Foreign Stocks are represented by the MSCI EAFE Index and Emerging Markets are represented by the MSCI Emerging Markets Index.  10-Yr Treasury is represented by the Bloomberg Barclays 10-Year US Treasury Bellwethers Index, US Bonds are represented by the Bloomberg Barclays US Aggregate Index, Global Bonds are represented by the Bloomberg Barclays Global Aggregate Index and Munis are represented by Bloomberg Barclays Municipal Bond Index.

Contact Michael K. Kauffelt, II, CFA

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107 Mt. Nebo Pointe
Suite 200
Pittsburgh, PA 15237
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Mt. Lebanon, PA 15228

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