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What’s the Right Equity Balance for Your Fund Portfolio?


As inflation rages and the stock market logs consistent declines, investors around the world are reconsidering their portfolio strategies. Too much exposure to any one type of asset could wipe thousands from your account balance — and many investors are left wondering what to do.

Recent findings suggest that the time for rebalancing your portfolio is now. Using data derived from the past two years, Northern Trust has found that putting your investment dollars on the defensive in one specific way might just save your bank balance–and increase your returns over the years to come.

A financial advisor could help you plan for retirement and help you select investments that align with your financial goals. Find a qualified advisor today.

How the Stock Market’s Historic Highs Affected Funds

The 2020 pandemic stock market crash gave rise to a big comeback, and many investors rode that wave to stunning highs. According to the 2021 Credit Suisse Global Wealth Report, the percentage of millionaires in the U.S. rose by nearly 9%, while the percentage of ultra-high-net-worth individuals jumped by 24% across the globe.

Northern Trust found that investment funds weighted heavily toward equities were also rewarded when the markets surged. For example, the Dow Jones Industrial Average Index rose 20.9% year over year, and the median return for the Northern Trust All Funds Over $100 Million, which manages institutional assets, jumped to 14.4%.

Why Public Equity Funds Beat Corporate Retirement Funds

public funds newsThe year 2022, though, is shaping up to be a different story. Easy money policies have caused a concurrent rise in inflation, and investor fears have ushered in another market pullback.

Over the past one, three and five years, Northern Trust corporate retirement funds have delivered returns of 7.9%, 14.3% and 10.4%. By allocating nearly 45% of assets to fixed income, these corporate funds may have protected their returns from sudden downturns in the market.

On the other hand, the company’s study found that public equity funds, which include a more diverse range of assets, have doubled returns over the past year compared to retirement funds. The five-year median return was 11.1% compared to 10.4%, though, suggesting that the long-term median returns of both fund types are somewhat close.

Investor sentiment does seem to play a role in recent gains. For example, during the fourth quarter of 2021, the Russell 1000 large cap index boasted a median return of 9.8% compared to 2.1% for the Russell 2000 small cap index.

Northern Trust Head of Investment Risk and Analytical Services Amy Garrigues said that shifting investor allocations following Federal Reserve tapering guidance has led to “strong tailwinds for large cap stocks.” This may explain why public equity funds, which often include more large-cap securities, more than doubled the corporate fund returns during the last quarter of the year.

How Retirement Savers Can Take Advantage

Based on Northern Trust’s findings, retirement savers and individual investors alike could benefit from rebalancing their investment portfolios.

The company’s findings indicated that shifting investments toward large-cap stocks could quadruple equity returns over the next year. Large-cap stocks are typically more stable and mature investments, with lower volatility and possible dividend payouts, and may provide some protection in a down market.

Additionally, the Northern Trust Public Fund allocated 20% of assets to fixed income. These investments often include government and corporate bonds, CDs and money market funds, offering a steady stream of income with relatively lower risk than stocks. That’s why retirement funds often allocate a larger percentage of assets to this category.

In a volatile market environment, taking a defensive approach to preserving and growing investment capital can be a smart decision. Northern Trust determined that, at least for the past year, allocating a fifth of assets to “safer” fixed-income investments and half to equity allows investors to benefit from stock market gains while providing a sufficient level of capital protection.

Bottom Line

public funds newsThe appropriate asset balance for you depends on your individual needs and strategies. A study by Northern Trust has confirmed that its fund allocations have provided a consistently high return for its clients and that shifting asset allocation to a more defensive position can still provide benefits over time. Investors might also enjoy similar returns by rebalancing their portfolios and reevaluating their investment strategies to account for the next year’s volatile financial climate.

Retirement Planning Tips

  • Not sure which investment strategy will help you retire early? For a solid, long-term financial plan, consider speaking with a qualified financial advisor. SmartAsset’s free tool matches you with up to three financial advisors in your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • Use SmartAsset’s free retirement calculator to get a good estimate of how much money you’ll need to retire.

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