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  • Writer's pictureDavid Bojan

5 Steps to Strategically Adjust Your Portfolio for an Impending Market Slowdown

Updated: May 16

It's less than two months into the year, and the Nasdaq is already up 6% while the S&P 500 is up 5.5%. It's an incredible follow-up to the Nasdaq's 43% gain in 2023 and the S&P 500's 24% gain.

With some market indices reaching new all-time highs seemingly every day and many stocks becoming more expensive, you may feel like you want to adjust your portfolio... but you don't know how. Investors in that camp have come to the right place.

5 moves to adjust your portfolio for a market slowdown:

Plant growing out of coins on windowsill

1. Allocate new savings to safer investments

If you want to avoid buying stocks that you think are overpriced, you can simply allocate new savings to safer stocks. The price-to-earnings (P/E) ratio of the S&P 500 is 27.3, but there are many value-oriented sectors of the market that still trade below the market average, like energy, materials, utilities, consumer staples, and financials.

The key to building a portfolio over time is just as much about regularly saving and adding new cash to your account as it is about picking the right stocks. Consistently saving takes the pressure off the need to sell a stock to buy a different one.

Of course, some investors may be in the asset distribution phase and are slowly withdrawing from their savings rather than building them up. In that case, this step won't apply, but there are still plenty of moves to make.


2. Make sure you aren't overexposed to a certain theme or sector

Over the last five years, technology is the only sector that has outperformed the S&P 500, with the communication (led by Meta Platforms and Alphabet) and consumer discretionary (led by Amazon and Tesla) sectors also performing well. The market is being driven higher by big tech. If you've been overly exposed to these sectors, you may be feeling particularly vulnerable to a market pullback. Companies aren't perfectly correlated to each other, but if Apple, Microsoft, and Nvidia all sell-off, chances are other big tech stocks - like Adobe, Salesforce, and the major chip players - will also sell-off.

A common mistake is assuming a portfolio is diversified because it includes many different stocks when weightings and allocation are far more important factors. A portfolio can hold 100 stocks, but if 75% of it is concentrated in just a handful of companies, then it's not as diversified as it may seem at first glance.

The counterargument is that you should always go with your highest conviction and best ideas. But now would be a good time to review your portfolio and ensure it achieves the level of diversification needed to suit your risk tolerance.

Glasses resting on notepad on wooden desk

3. Revisit investment theses and make sure they still hold up

If you find that your portfolio is overly concentrated in a certain sector or theme, you may wonder which stocks you should consider selling.

Valuation matters, but an even more important point is the investment thesis. If an investment thesis isn't broken or has gotten even stronger, holding a stock may be a good idea even if it has run up.

A good example is Microsoft. Microsoft is up 275% in the last five years and is now the most valuable company in the world. Such a scorching hot stock may seem like it's overbought and ripe for a sell-off. But there are good reasons why Microsoft is a fair value.

For starters, the investment thesis has gotten stronger. Microsoft is a higher-margin, faster-growing company today than it was just a few years ago. Its legacy business units are doing well, its cloud business continues to surge, and artificial intelligence is having a measurable effect across its business units.

Microsoft has a 36.8 P/E ratio, which seems high. But if Microsoft can grow earnings by 15% or more per year, the stock could begin to look inexpensive rather quickly. A 15% compound annual growth rate results in a doubling in five years. So it wouldn't take a lot for Microsoft to double its earnings five years from now. I think Microsoft will average a growth rate even higher than that, which is why its current valuation is reasonable.

You may not want to sell a stock just because it has gone up, especially if the investment thesis justifies the price appreciation.

Nvidia sign with green light

4. Beware of 'story stocks'

Nvidia was the best-performing stock in the S&P 500 in 2023. It is up a staggering 49.2% so far this year, making it the best-performing stock in the S&P 500 again in 2024 so far.

Nvidia is a phenomenal business that has a clear runway for several years to come, if not decades. But it has become a story stock.

A story stock's valuation is based on what the company could do years from now, not what it is likely to do over the short term or even the medium term. In other words, optimistic investors continue to buy up a stock because they are projecting incredible growth without discounting the uncertainty that the growth will be lower than expected.

There are plenty of cases of story stocks living up to the hype, but then underperforming the market because so much growth was already baked into the price. Just look at Tesla, which is down around 50% from its all-time closing high of $409.97 a share on Nov. 4, 2021. Tesla as a company has grown a lot over the last few years, but the stock was priced to perfection.

The more Nvidia stock goes up, the more it will have to deliver blowout results quarter after quarter. At a certain point, it becomes unsustainable. An industrywide downturn, competition, or any unknown could throw a wrench in the growth rate and make the stock overvalued. It's unclear whether Nvidia is overvalued just yet. But it's the kind of company that could be worth trimming if you had, say, 5% of your portfolio in the company and now it has grown to 25%.

Black cards with buy and sell against wooden floor

5. Don't sell everything

The absolute worst thing an investor can do is think the market has peaked and sell their entire portfolio (or close to it). History shows that every dip in the market turned out to be a worthwhile buying opportunity. The stock market may not have a blowout performance for the rest of the year and may even sell off. But making all-or-nothing decisions in the stock market is a great way to lose your shirt.

We're all human, so there's a psychological element to investing that's worth monitoring. The best way to invest is by building positions over time, rather than trading in and out of stocks or sectors. The ideas discussed here may lead you to make a few portfolio moves, but they shouldn't result in a complete portfolio makeover.

High-quality, expensive stocks tend to grow into their valuations over time. If you're a long-term investor, the objective should be to stay involved in the stock market, not jump in and out when things look frothy. If you're fighting the urge to sell everything, you may want to review your reasons for investing and ensure they align with your financial goals.

Healthy exercises

If you've been investing long enough, chances are you've been through the roller coaster of emotions that come with market volatility. You'll never make perfect decisions, but you can put yourself in a position to stay level-headed by going through healthy portfolio moves that are measured and not over the top.

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