4 ways to prepare your portfolio for 2023

Tom Larm, CFA, CFP
Portfolio Strategist

Investment portfolios traveled turbulent times in 2022. High inflation caused many central banks to raise interest rates faster than investors had anticipated, and stock and bond investments fell as markets readjusted.

As difficult as the year was to digest, it served as a reminder to keep your portfolio focused on your financial goals, and we believe it created opportunities for disciplined investors. For 2023, we recommend reviewing your situation with your financial advisor.

Here are four ways you can help prepare your portfolio for the year ahead.

1. Benefit from the power of diversification

Inflation — and the Federal Reserve’s ongoing response to bring it down — will likely continue to drive markets in the coming months. While the jury may still be out on how much more the Fed may need to do to cool inflation, we believe we’re closer to the end of the tightening cycle than the beginning. We expect inflation to trend downward in 2023, easing some pressure from investment portfolios.

The rest of the cycle may not be smooth, but we believe diversification can help level the path. High-quality bonds, for example, have the best track record of moving in the opposite direction from stocks.

With interest rates meaningfully higher now than at the start of 2022, we believe bonds are better positioned to provide diversification. Their higher yields mean bonds can offer attractive investment opportunities, particularly for long-term investors.

We recommend your portfolio include a variety of stock and bond asset classes to help keep you aligned with your comfort with risk. Spreading investments across sectors, geographies, bond maturities and equity styles can also help prepare you for the year ahead. Talk with your financial advisor about how diversification can help manage risk in your portfolio.

2. Be planful about rebalancing

Over time, the value of each investment in your portfolio can change, moving you away from your desired allocation. In 2022, for example, a strengthening dollar, geopolitical headwinds and rising fears of slowing global growth weighed on international stocks. Therefore, for much of the year, international stocks performed weaker than U.S. stock investments, while cash investments took the lead.

Markets priced in a significant amount of uncertainty as valuations adjusted lower this past year, but we don’t expect a repeat of this in 2023. We believe the Fed will slow and eventually pause interest rate hikes, which means market dynamics are also likely to shift. Additionally, lower prices provide an opportunity to add investments to your portfolio with the potential for higher long-term returns.

No one can predict which asset class will outperform in any given year. We expect leadership across asset classes to continue to rotate as the environment shifts. Having a planned rebalancing strategy can help you avoid chasing the previous year’s top performers, keeping your portfolio focused on your financial goals.

3. Consider systematic investing

In 2022, economic uncertainty triggered market volatility, but short-term volatility is a normal part of investing. We’re likely to hit more bumps this year as investors focus on inflation and central bank policies, and how those factors may impact economic growth prospects and corporate profits. That said, a lot of the move downward may have already occurred this past year.

Trying to time the market’s tops and bottoms is stressful and impossible to do consistently. Systematic investing — or investing at regular intervals throughout the year — can help remove some of the guesswork and emotions around investing.

It can help you take advantage of more favorable prices as markets fluctuate — a process called dollar cost averaging — and provide natural rebalancing opportunities for your portfolio. Talk with your financial advisor about how systematic investing may help your situation in 2023.

4. Let your goals be your guide

This past year was challenging, but it doesn’t represent how we expect markets to perform in 2023 or on average over the long term. While lower stock valuations and higher bond yields may translate into better potential long-term returns going forward, you should expect periods of volatility to continue.

The calendar is changing, and new headlines may come along with the new year. But at the end of the day, your financial goals should drive your investment strategy. Talk through your goals with your financial advisor, reviewing if your situation has changed, and evaluate opportunities to position your portfolio for the year ahead.