Your portfolio in 2021
Many investors are still catching their breath from last year's wild ride.
For the markets 2020 was one of the most volatile years on record: A 34% decline in the S&P 500 in February and March, the fastest ever 30% decline (22 trading days), and two of the top five worst days in the history of the Dow Jones industrial average, drops of 12.93% and 9.99%. The DJIA was first published in 1896.
What ensued was just as surprising: The market rallied in April and didn't look back. Amid the pandemic, lockdowns and 15% unemployment, murder hornets, civil unrest and the election, the S&P 500 including dividends finished the year up 18%. Makes sense, right?
Last year reminded us that the world doesn't typically unfold the way we think it will.
That's a valuable lesson for investors in the years ahead. Here are three other considerations for your portfolio in 2021:
1. There's nothing wrong with taking gains
If your stock portfolio had a few big winners in 2020, consider diversifying out of those concentrated positions. When weighing the pros and cons, remember that "getting rich" and "staying rich" are two different skills. Risk management plays an important role in managing wealth, and that's no different here. If you've become attached to a particular stock in your portfolio, you can split the difference instead of a full liquidation.
In addition, you may want to realize some of the long-term capital gains in your non-qualified investment accounts. With a new administration and the national debt approaching $28 trillion, capital gain tax rates are likely to increase in the future.
2. Avoid going all in or all out
I'm optimistic about the stock market this year. Economic reopening, effective vaccines and stimulus are just one part of the story.
Consumers want to spend in 2021 (hello pent-up demand) and have the balance sheets to do so: The personal savings rate skyrocketed in 2020 and is still near a 50-year high pre-pandemic. In the last year checking accounts of American households have more than doubled from $800 billion to $1.8 trillion.
While the economy is not the stock market, these should be tail winds for equities.
The data may suggest a strong recovery, but we don't know what the future holds. Going all in or all out is usually not a good idea. In hindsight, moving to cash in March 2020 did not pay off. Likewise, going all in now may not be smart either. Find the balance that works for you and identify an asset allocation consistent with your risk tolerance and time horizon.
3. It's you vs. your goals
I read an article recently about the neighbors of lottery winners. They're more likely to take risk, spend and borrow more and declare bankruptcy. Keeping up with the Joneses is real.
There are pockets of speculation in this market. You've probably heard stories of people hitting it big trading stocks. Remember that you're not competing against them or any other benchmark.
The only thing that matters is whether you are on track to reach your own financial goals. When FOMO sets in, try to keep those feelings from affecting your portfolio and give yourself the best probability of long-term success.
• Jim Platania Jr. CFP®, CPA is a wealth management adviser at Platania Financial Inc., Arlington Heights.