Tax Alert: Your Weekly Update - S&P 500 Declines Year To Date

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Weekly Market Recap

This week saw general declines for stocks, with the popular S&P 500 benchmark moving into losses for the year. We see this decline based primarily on China concerns. These declines occurred despite good housing and jobs data in the US this week. Other developed markets, such of those of the Eurozone and Japan are also show healthy recent economic activity based on August surveys. So, developed markets are on a positive trajectory in our view.

Clearly, Chinese concerns have dominated market sentiment. Although Chinese stocks have declined in recent months, much of this has only served to reverse rapid Chinese gains from earlier this year. Over a one year period, the Shanghai Composite stock index is actually up well over 50%. Also, note that just last week the International Monetary Fund projected the Chinese economy to grow 6.8% in 2015. That's slightly below the Chinese government's 7% target, but still more than double the growth rate in most other economies, including the US. So as much as markets are concerned about China, the Chinese stock market is actually still up healthily on a 12 month view, and with an economy growing fast, at double the rate of the average country.

Of course, history shows that a robust strategy is to buy and hold in environments such as these, maintaining your investment goals and risk tolerance. We've seen similar dips to this one in October 2014, June 2012 and August 2011 and in countless prior years. These all proved to be temporary with the market ultimately returning to new highs. In fact, DALBAR research has shown that changing course in market declines can cut your returns by 4% a year. Therefore, we believe changing course is likely to be harmful.

To complement a buy and hold strategy, and especially because markets may be overreacting currently, rebalancing your portfolio can be valuable. Rebalancing is intended to prevent your portfolio drifting from its goals, and avoids emotional trading based on fear or greed. We employ threshold-based rebalancing so that if any asset moves too far from its target weight, then we recommend a rebalance, or rebalance automatically for Premium customers.

Generally, rebalancing means selling assets that appear more expensive and buying those that could be more attractively valued. At times when the market "mean reverts" this can help returns by as much as +0.4% a year according to research. It helps to keep your risk tolerance constant, because you risk tolerance should not change due to market movements, and altering it could counteract potential rebalancing recommendation benefits.

The frequency of rebalancing recommendations is dependent on market movements and higher volatility will typically drive greater rebalancing activity. Note that what we monitor for rebalancing is not whether the markets are up or down, but how different asset classes move against each other. We monitor your portfolio daily for appropriate rebalancing opportunities, but only make a recommendation to you when we believe the benefits of doing so outweigh the costs.

Remember, maintaining a diversified portfolio with techniques such as automatic rebalancing is only one of our nine best practices. Log in to your account to see a your assessment of how you are doing across all nine.

Disclaimer:
The views expressed herein are not intended to serve as a forecast, a guarantee of future results, investment recommendations or an offer to buy or sell securities by FutureAdvisor. Differences in account size, timing of transactions and market conditions prevailing at the time of investment may lead to different results, and clients may lose money. Past performance is not indicative of future results. The tax loss harvesting strategy discussed should not be interpreted as tax advice and it does not represent in any manner that the tax consequences detailed will be obtained or that its tax loss harvesting strategy will result in any particular tax consequence. Clients should consult with their personal tax advisors regarding the tax consequences of investing.