Your 3-Step Summer Portfolio Tune-Up

Adam Fischbaum's picture

Tuesday, May 30, 2017 - 2:30pm

by Adam Fischbaum

Around our house, the month of May always seems to be unusually hectic. My wife is a teacher, so she is buttoning up her school year. My teenagers are furiously studying for and taking exams. Often, it seems that this domestic volatility is also found in the market.

There is some truth to the investing adage "sell in May and go away." This 10-year chart is compelling evidence.

Over the last 10 years, the S&P 500 has experienced noticeable volatility during the month of May 9 out of 10 times. Would you have been better off selling and sitting on cash? Maybe, maybe not.

However, as we approach the mid-year point, there are a few things investors can do to ensure their portfolio is well positioned for the second half of the year. Here are three key steps to take for a summer portfolio checkup.

1. Review Non-Core Holdings
Good portfolio construction should include both core and non-core stocks. Core stocks would be those purchased based on a long-term, strategic story like the rise of the global middle class, the Internet of things, the aging baby boomer population, or consistent dividend growth. These are phenomena that take many years, even a decade, to play out. Non-core holdings are tactical ideas that were bought for a trade based on an event like a merger, seasonal move, or another special situation.

In the non-core space, it makes sense to evaluate why you bought the stock in the first place. Has the story played out? Do you have a decent gain? If that's the case, consider taking it. Recently, I sold a non-core position that was showing a 12% gain in just one month. Annualized, that comes out to 120%. If you have a loss and the story is not playing out, it may be time to cut that idea loose.

2. Evaluate Portfolio Income 
Do you have a portfolio yield goal of, say, 5% or 6%? Have you reached that number? If not, then consider adding positions that will help you get there. This exercise will not only keep you focused on your investment objective, an income stream can also help combat volatility and uncertainty should the market decide to take a summer siesta.

Consider using closed end funds (CEFs) to beef up your income. Utility stocks are also a good choice. (Here are some ideas I've shared recently.)

3. Look At Valuations
As markets climb higher, stock valuation metrics, P/E ratios in particular, will expand. If you bought a stock with a forward P/E of 17 and the forward P/E now sits at 22, the price of the stock has probably moved close to 30%. It may be prudent to trim that position some. If you own 500 shares, consider selling 20% of the position (100 shares), perhaps even 30% (150 shares). If the market pulls back, higher P/E stocks will be punished. If your stock is trading at a 22 forward P/E and the market's forward P/E is 19, the invisible hand may try to bring that back to parity and, more often than not, it will succeed.

Risks To Consider: Currently, the biggest risk facing the market is the risk it ALWAYS faces: uncertainty. And there are plenty of uncertainties out there from geopolitical unrest to the domestic economy. Being aware, not afraid, of risk proactively managing it is the best way forward.

Action To Take: Historically, financial markets can experience measurable volatility leading into the summer months. Many times, this can wind up being dreadfully dull. But just like the family car before a summer vacation, your portfolio deserves a preventative tune-up before the potentially dangerous summer months

Editor's Note: This indicator avoided the 2008 market crash... and got you back into the market just 4 days after the bottom. To use it, click here.

Adam Fischbaum does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.