With the S&P 500 on track to gain more than 18% in 2024, it may be time for investors to make some defensive moves in their portfolios. The technology sector, including artificial intelligence play Nvidia, has helped lift the overall index, which is up 33% this year alone. But that surge is prompting some financial advisers to reevaluate their clients’ exposure to large-cap tech and turn to currently untested asset categories that may be ready to grow. “We just released our playbook and we’re advising clients that research suggests a flat market is likely over the next year or so, with a 5% to 10% drop in between,” said Sean Anderson, chief wealth strategist and certified financial planner at Anderson Financial Strategies in Dayton, Ohio. “We’re thinking the second half of 2024 is going to look completely different than the first half, and that’s when we’re going to see that.” [Federal Reserve] “When interest rates start getting cut, a lot of those unloved asset classes will come to life,” he said. In fact, the market has already started showing signs of this rotation away from Big Tech highflyers, with the small-cap Russell 2000 gaining more than 10% over the past week while the S&P 500 gained a more modest 1.3%. .RUT .SPX 5D S&P 500 vs. Russell 2000 Over the Past Five Days This recent migration into rate-sensitive areas of the market, such as banks and other financials, has been aided by June’s monthly decline in the Consumer Price Index and comments this week from Fed Chair Jerome Powell that the central bank won’t wait for inflation to hit 2% before cutting interest rates. Seek income in less popular places “Think about equity portfolios and the potential to provide some additional income, as well as some of the sectors in which the market is broadening sequentially,” said Shannon Saccocia, chief investment officer at NB Private Wealth, a division of Neuberger Berman. Some places where investors can look for these plays include utilities — Saccocia said one play is on the electrification theme — and real estate investment trusts. “From a sentiment standpoint, it’s just an overhang of office [real estate] “It continues to impact investors in REITs in the public sector,” he said. “But if you look at income generation, and you see rates starting to come down, that could be a sector that could benefit from even a single rate cut.” Saccoccia also likes healthcare, which is up a modest 10% through 2024. “It may take a little longer to manifest but we think that [health care] “It’s an interesting combination of offense and defense, and it provides meaningful cash flow for investors,” Saccoccia said.The Vanguard Dividend Appreciation ETF (VIG), with a total return of 11.2% through 2024, has a 24.4% weighting in technology, but financials make up 19.7% of the fund, while healthcare accounts for 16%. Household names in the exchange-traded fund include JPMorgan Chase, which is paying a dividend yield of 2.2%, and UnitedHealth Group, which has a yield of 1.5%. Examining risk and liquidity Investors reviewing their 2024 gains should also reevaluate their risk profile and consider whether their asset allocation reflects their long-term goals, including making sure you have investments in asset categories that aren’t necessarily performing well now but could perform well in the future.” Reviewing your asset allocation and risk profile also includes making sure you have enough cash to cover your needs for 12 to 18 months so that you don’t have to sell positions from your portfolio in an emergency. Clients are keeping this ready, liquid cash in money market funds, with the Crane 100 Money Fund Index showing an annualized seven-day yield of 5.12%, while others are using Treasury bills to save for time-sensitive goals in the near term, Gerety said. Cautious approach Some advisors are giving clients a combination of upside exposure and downside protection. Tom Balcom, CFP and founder of 1650 Wealth Management in Lighthouse Point, Florida, said Balcom, “In 2022, the market sold off and our clients suffered losses, but not as much as stock and bond investors did that year.” “We use them to retain clients during volatile times.” Retail investors can leverage something similar in the form of buffer ETFs, which use options to provide investors some protection against market losses. While buffer funds may make sense for individuals who are nearing retirement, they will need to be comfortable with wildly rapid misses, and they should understand the fees associated with these products, which can range from about 0.75% to 0.8%, according to Morningstar.
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