What’s in Your Portfolio?
Do Americans Really Know?
By Angela “Angie” Koch, CEO of U.S. Money Reserve
We’re all familiar with the standing rule for purchasing real estate: location, location, location. We may want to adopt a similar rule for building a financial portfolio: diversification, diversification, diversification.
The rate of stock ownership in the U.S. is now the highest since the Great Recession, with over half of us holding a little slice of Wall Street in our asset mix. While stock ownership has dropped since 2007, the number of consumers vested in the financial markets is now on the rise thanks to a stronger job market and automatic enrollment in various workplace 401(k) retirement accounts.
Until earlier this month, the markets had been on a record-setting run — unprecedented calm, unparalleled point gains, and eight trillion dollars in new market value. But it’s all fun and games until someone loses — a fortune.
The recent market rout was sudden and unanticipated. The massive sell-off marked Wall Street’s worst week in two years, the biggest point drop in history, and some $5 trillion in lost value. And the market correction came despite positive economic news and rising growth. We’re now left with the uncertainty of whether the correction was an anomaly or a warning shot.
Market corrections are never welcome or pleasant events, and this one got our attention for several reasons. First of all, it had been a long time since a unilateral sea of red rolled over the Dow and the world. Secondly, we’d gotten complacent and almost unmindful that the market could even drop, never mind crash by over 10%. Thirdly, we felt it. The portfolio mix of the average U.S. investor is now more weighted toward stocks than ever before — particularly among those closest to retirement.
According to the Federal Reserve, senior Americans are now holding more stocks in their retirement accounts than at any other time in the last 30 years. Older boomers were at the height of their earning power during the economic prosperity of the Reagan era, and many directly benefited from the great bull market of the 1980s. The nostalgic notion of Wall Street’s invincibility may, in part, explain this population’s overexposure to equities. What explains the rest? A simple lack of knowledge. A recent poll found that over 70% of Americans have no idea what’s in their portfolio — never mind how it’s allocated.
This causes us to ask, what’s in your portfolio? Is your asset allocation balanced? Are you holding cash? Do you have some gold? If the market corrects by 10% or 20%, will you be able to sleep at night?
While losing money in the market is never desirable, it’s far worse at 60 or 70 years old when risk tolerance is diminished and recovery time is shorter. Holding too much of one thing, particularly equities, brings systemic risk. For older boomers that suffer a major valuation loss, the math gets harder, and recouping lost savings becomes wishful thinking.
In all the post-correction quarterbacking, analysts are now looking at the markets with a degree of incredulity. Rising wages, soaring consumer sentiment, growing GDP, surging corporate profits — and a market crash. Really? It goes against traditional and historical metrics and underscores Wall Street’s utter unpredictability.
With interest rates rising, inflation stirring, home sales softening, debt accelerating, and the economy at risk of overheating, Wall Street is facing a variety of new challenges. If you still have all your eggs in one shaky basket, it’s high time to start swapping things out.
Diversification, diversification, diversification. We can help.