Broker Check

Your Worst Performer Last Year May Just Be Your BEST Performer This Year

May 05, 2023

          Yep, 2022 was a tough year for the stock market, in general. With the Fed raising interest rates over 8 times now, it's brough valuations down. Especially in those high-flying growth companies. Though not all stocks did poorly last year. In fact, value stocks, that tend to trade at historically reasonable price to earnings, faired quite well. Things like energy and utilities. The asset class that may not have a huge potential for growth, but instead may pay a steady, predictable dividend with a reasonable P/E (price to earnings ratio). But don't get caught, like so many investors do, trying to chase the returns from last year. In fact, many times, those investments that got hit the hardest one year tend to be the best performer the following year, as you can see on the historical asset performance chart. 

          This is where the principle of asset allocation and rebalancing comes in. The concept is simple, but too many times, I've seen people avoid those asset classes that had taken the biggest beating the prior year, when in fact, they should be taking advantage of the decline in value. By starting with a mix of asset classes in their respective percentages, you can re-evaluate how those percentages have changed over time. In other words, let's say you started the year with a model recommending 15% in US large cap growth stocks and as I've just mentioned, those assets took the biggest hit. Well, after freshly reviewing the percentage allocation, you may now only have 12% of the portfolio in US large cap growth stocks, due to the double-digit decline in value. This presents an opportunitiy to rebalance. Since US large cap value held up quite well, you're probably overweighted US large cap value. So now would be the time to take some of the froth off the top and rebalance to US large cap growth to bring your total percentage mix back to the original asset allocation model. 

          By implementing this simple investment planning strategy, you will remove all emotion from your investment decisions. You won't get caught up chasing returns or following the pack. But instead, you will simply realign your portfolio with your risk tolerance, while taking advantage of the moves in the market, up and down. Of course, your individual circumstances may be different, and this should not be construed as investment advice. But if you would like to review your personal asset allocation and how much risk you do have to see if this is a good opportunity to rebalance, give us a call to discuss.