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Investors are complacent. U.S. bias runs rampant. Here’s how to protect your portfolio

What could possibly go wrong? Well, in my opinion, the answer is “plenty” if you stop for a moment and think about how far we’ve come from the March 2009 lows of the Great Recession.

Proactive investors must now consider future events under a host of different political and economic scenarios. Now is a great time to begin preparing for the fourth quarter of 2019 and the election year 2020.

It’s easy to be pleased with U.S. stocks of every stripe as we enter the 11th year of an economic expansion. Small, medium and large companies are having a great year, as are bonds, growth companies, technology stocks and certain passive index exchange-traded funds or ETFs. The S&P 500 Index continues to outperform nearly every other asset category during the Great Recovery.

The word I believe best describes current investor attitudes is complacency. It’s worth asking investors how they might adjust their positions and potentially lower risk. But common responses to asset allocation and portfolio rebalancing suggestions include “it’s working”, “why change now?”, and “we’re all set.”

Adding exposure now to perennial “losers” seems to be met with laughter and skepticism. Home-country U.S. bias is running rampant.

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Mark Daly

As the U.S. market continues to outperform, exposure to the unloved and unwanted groups continues to shrink. You may find that your exposure to emerging market stocks, for example, is minuscule or nonexistent, despite excellent long-term performance for this category. And yes, it comes with more volatility and higher risk.

Global equities tend to be much cheaper than U.S. stocks when considering index characteristics like price/earnings ratios, price/book value, and dividend yields.

Commodities have struggled at times for the past 10 years, racking up annual losses under the forces of deflation, loose monetary policy, and the gig economy.

I believe capital will eventually flow to where it receives the best treatment. So consider adding some underperforming assets to your holdings, including developed global markets, emerging markets, and cash equivalents, if appropriate for your situation. Consider adding a small position if you believe inflation might make a comeback.

Proper diversification offers a chance to improve portfolio performance, cushion market downturns, and capture upside potential from underperforming assets. Lowering volatility can reduce the urge to panic sell in response to sudden market declines when you are more prone to emotional decisions.

Proactively changing your portfolio now, despite what’s working today, requires courage and discipline. Be prepared to be early and wrong, and give changes time to work.

In my experience, the properly diversified portfolio is positive most years, loses less in a down market, and avoids making large bets on a single strategy. Most successful investors have learned that this approach is more than adequate to achieve most, if not all, financial goals.

Mark Daly is an investment management analyst and a financial adviser at The Perpetua Group in Boise.

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