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Striking A Balance

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Hi there,

It’s beginning to look a lot like Christmas (in July): consumers are scooping up deals like it’s Black Friday, everyone is eagerly anticipating a new Barbie, and Jimmy Fallon is singing carols. But that’s where the comparison ends; the mercury tells us it’s still summer. Here’s what else we’re watching this week:

⬇️ Inflation cools: Consumer prices rose just 3% in June. Falling costs for airfare, used cars, and furniture helped bring overall inflation to its lowest level in more than two years. Even so, experts still expect the Federal Reserve to raise interest rates later this month.
🥵 Climate worries: While much of the world has been sweating out record-breaking heat waves, the Northeastern US has been coping with devastating floods. Now experts are warning about “underground climate change.” If you’re worried about how wild weather will impact your investments, we have some tips on how to prepare your portfolio for climate-related effects, and our Guide to Cleantech Investing might give you some more ideas.
✅ Report card time: Tomorrow kicks off the next earnings season, when publicly traded companies tell us how they performed (or didn’t) in the last quarter. Barron’s and The Wall Street Journal share some analysts’ forecasts in this latest round of reports. (Spoiler alert: many analysts are predicting lower profits — but some say that gives companies a low bar to clear.)

Also, ICYMI, we passed the halfway mark of 2023, making this a good time to check in and ensure your investment portfolio is balanced and in line with your goals. We’ve got some tips on how to do that below.

News you can use

Graphic of news publication with headline of "News"

Best companies for innovators, revealed. If you want to invest in companies that are more likely to achieve big breakthroughs, Fast Company’s latest ranking might give you some ideas. The Best Workplaces for Innovators list includes more than 150 companies that strive to create a culture of innovation. Publicly traded companies featured include Zebra Technologies, Expedia, LG, Trimble, Siemens, and Adobe — to name a few.
More than one-third of Gen Z and millennials have friends who lead them to overspend. If you’re falling victim to friendship lifestyle creep, you’re not alone, according to a new survey from Intuit Credit Karma. Researchers also found that 88% of millennials and 80% of Gen Zers say that hanging out with a “spendy” friend has put them in debt. Looking for tips on how to break that cycle and pay down debt? Start here.
Instant payments coming to a bank near you: If you bank with one of the 50 financial institutions adopting the Federal Reserve’s new FedNow system, you’ll soon be able to make instantaneous bill payments and account transfers, even on holidays. Here’s an overview of the new program and how it might impact the way you manage money.

The FWIW reading, watching, and listening list

Whether you’re planning an overseas adventure, trip to the beach, or relaxing staycation, we hope you get plenty of time to unwind this summer. We’ve compiled a list of our favorite books, podcasts, and other resources that will help take your investing knowledge to the next level while enjoying much-needed downtime. See our recommendations.

Asking for a friend….

We know there is a lot to think about these days, and it can sometimes be a bit overwhelming. To help with those nagging questions and so you have useful resources at your fingertips, here are a few links to resources and past stories relevant in these turbulent times:

Diversify, diversify, diversify

When it comes to managing risk and limiting losses in investing, one centuries-old adage — “don’t put all your eggs in one basket” — is a great way to think of your portfolio. Concentrating all your money (eggs) in just one or a few investments (baskets) leaves you vulnerable to huge losses (no eggs, mess). But when you diversify your portfolio, you hold a broad range of investments that react differently to financial and economic events, fluctuating at different times.

This doesn’t guarantee returns or fully protect you from losses. It also limits the potential upside, as well as the potential downside. But experts agree it is your best shot at getting the smooth and steady returns needed to build wealth in a world where famed companies can go bust overnight (Enron, anyone?), technologies and products can fail or become redundant, charismatic CEOs can die, global pandemics can halt all movement, wars can break out, supply chains can collapse… you get the picture.

You may hear that professional investors like Warren Buffett don’t rely on diversification, but most of us aren’t octogenarians with decades of proven track records and uncanny abilities to pick future stock winners. We are trying to grow our savings to build a buffer for our futures while still making sure we can pay our monthly expenses, hang out with friends and, maybe, splurge on tickets for the Beyoncé concert coming our way.

These are some of the initial steps many financial experts recommend you take to diversify your portfolio:

1. Choose assets and cast a wide net

In order to achieve a diversified portfolio, it must hold a variety of asset types, like:

Stocks: There are thousands of companies with shares listed and trading on US stock exchanges. How to work through your options while trying to balance your portfolio can be overwhelming. Some tips from experts: They recommended owning stocks from companies operating in different sectors/industries (technology, financial, consumer staples, energy, etc.), as well as those of varying sizes (large-cap >$10 billion, mid-cap >$2 billion, small-cap >$250 million, etc.). Switch it up with shares from different countries and dividend-paying, blue-chip (value), or rapidly growing options. Experts say a good way to diversify is through ETFs and mutual funds that offer exposure to many stocks at once (passively managed index funds are a good example of this). Some popular examples include the SPDR S&P 500 ETF Trust, Vanguard Total Stock Market ETF, and iShares Core MSCI EAFE ETF.
Fixed income: As the name suggests, these investments give you a guaranteed fixed income in the form of interest. These types of assets include corporate bonds, Treasury bonds, municipal bonds, Treasury bills, Treasury notes, and certificates of deposit (CDs). Experts recommend owning high-quality bonds of different kinds with different durations. Sustainability-focused investors may also consider green bonds. As with stocks, you can diversify by buying fixed-income funds. Popular examples include the Vanguard Total Bond Market ETF, iShares National Muni Bond ETF, and JPMorgan Ultra-Short Income ETF.
Cash and cash-like: These are low-return, low-risk, short-term, and liquid (easily converted to cash) assets like domestic or foreign currency, bank accounts, and money market funds. Treasury bills and CDs may also be included if they have short maturity periods (typically 90 days or less).
Alternative investments: Investments that are not stocks, bonds, or cash fall under this category (yes, even your niece’s lemonade stand, but no pyramid schemes, please) – real estate, cryptocurrencies, art and collectibles, commodities like precious metals and oil, derivatives, hedge funds, private equity, and venture capital. Most are meant for sophisticated investors since they are illiquid, require large investments, and come with heavy risks and few protections. As a regular investor, experts note that you can still gain exposure to some alternative investments, for example real estate investment trusts (REITs), Bitcoin, gold, and funds like the Invesco Optimum Yield Diversified Commodity Strategy No K-1 ETF.

2. Decide asset allocation

So you know all the different ingredients that go into a diversified portfolio, but how much of each do you add? This recipe doesn’t come with strict measurements, and experts advise adjusting it depending on your age, investing goals, and tolerance for risk. Stocks are considered riskier than bonds, which are considered riskier than cash. Usually, the younger and further away from retirement you are, the more risk you can afford to take in the market. You can use an online asset allocation calculator like this one, a robo-advisor, or have a conversation with a financial advisor to decide the right mix for you, but here are some popular guidelines from financial experts:

The rule of 110: Subtract your age from 110; this will tell you how much of your portfolio should consist of stocks. If you’re 30, this rule of thumb says 80% (110 - 30 = 80) of your portfolio should consist of shares, the rest bonds and cash.
The traditional 60/40: That’s 60% stocks and 40% bonds. This classic, “moderate risk” formula is recommended to retail investors broadly. However, its poor performance in recent years has some experts asking if this simple approach is enough during current market conditions (high inflation and rising rates), which are bad for both stocks and bonds. The good news is such times are extremely rare. Looking at rolling monthly periods since 1926, stocks and bonds were both negative on 16 occasions or 1.4% of the time, according to Michael Batnick, a managing partner at Ritholtz Wealth Management.
5%: No single security or investment should make up more than 5% of your portfolio.

Of course, no single rule will work for everyone, so please consult with your financial advisor and do your own research before making any financial moves.

3. Don’t overdo it

While you add ETFs and mutual funds to your portfolio to diversify it, experts recommend studying their underlying holdings and avoiding too much overlap. Too many funds could lead to concentration or doubling down on certain parts of the market. Fund fees also add up, and you run the risk of watering down your performance.

4. Rebalance periodically

You’ve diversified your portfolio, and you’d like to forget about it for a while. Go ahead; you’ve earned it! But investments grow or shrink in size, so make sure to return periodically for a checkup to ensure your asset allocation is still aligned with your goals.