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Rising Rates, Mixed Indexes, & Your Portfolio

Nowadays, if you turn on the television, open your news reader of choice, or tune into your favorite podcast, the gloom and doom of a recession has passed.

Most financial experts now predict that the worst of the market drawdown has come and gone and that even if a recession does settle in, investors have seen the worst of it.

Stock investors have seen the S&P 500 nearly return to its record highs from December 2021. Gone are extreme inflation fears and the impending doom of rising rates. Instead, Wall Street has embraced the uncertainty and digested the news it needed to move on.

But bond investors have yet to be as lucky due to the accelerated rate increases from the Federal Reserve, which has negatively effected bond valuations and their paper face amounts.

Since their August 2020 highs, major bond indexes are down nearly 20%, meaning stocks and bonds are out of step. Such one-sided recoveries mean that most investors holding stocks and bonds have misbalanced portfolios, which warrant rebalancing.

Resyncing one's portfolio to their goals is essential since drifts in stock to bond allocations change how much risk an investor is subject to.

For example, drifting away from a 60/40 stock-to-bond portfolio to one that is 70/30 increases a portfolio's short-term loss potential by up to 12.5%. While that may not seem like much, for an investor holding a half-a-million-dollar portfolio, that is equivalent to potentially losing an extra $62,500 should an unexpected drop that is among the historical worst occur!

Meanwhile, an investor who lets their portfolio drift more conservatively than they intended, dropping to a 50/50 stock-to-bond portfolio, could miss out on gains of up to 21.5%. For the same investor, that is the equivalent of forgoing an increase of $107,500!

Thus, staying within one's desired risk zone is essential, and at Lundeen Abrams Advisors, we generally suggest avoiding a portfolio drift of more than 5%.

Portfolio drift is a natural phenomenon, and rebalancing once to twice a year is sufficient for most people since can include short-term tax consequences if done too frequently.

Still, suppose you experience a significant portfolio imbalance. In that case, it is wise to monitor it prudently and make changes should your portfolio substantially exceed or drop below your risk tolerance.

We regularly monitor our client portfolios to watch for changes in a client's stated risk tolerance. If changes are warranted, rebalances occur.

We also recognize that risk is not static and changes, so we ask clients to review their investment policy statements with us to ensure their current situation aligns with their portfolio.

If you have yet to review your life changes with us in the past year, please call us to schedule a time to review your investments. We will also proactively contact clients over the coming months since we recognize that life flies by and distractions happen.

If you are not yet a client of Lundeen Abrams Advisors, then now is a great time to have us review your portfolio. We look forward to talking with you soon!

The Lundeen Abrams Advisors Team

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