When it comes to investing, there is always an element of uncertainty and risk. Yet, on the flip side, there is also the potential for returns, profits, and gains. This risk versus reward balance remains top of mind as we make investment decisions. And it requires us to constantly analyze market trends, watch economic markers, research investment opportunities, and maintain diversification strategies.

Strong market performance, strong returns

During the third quarter, our investment committee faced some important decisions about balancing risk and reward. The markets have experienced a strong run these past few years — particularly in large-cap and technology companies. And based on our analyses, we determined that the markets were looking too rich — meaning, prices have risen to levels where the risk of a market pullback outweighs the potential reward of remaining invested.

To avoid the risk of overexposing our portfolios, we chose to take some profits off the table. By strategically selling certain investments, we are:

  1. Locking in gains from the strong market performance we’ve experienced
  2. Rebalancing portfolios that were overweighted in large-cap and technology
  3. Building cash reserves, also known as “dry powder,” to take advantage of market corrections

Think of this strategy like a seasoned mountain climber. After scaling a steep section and reaching a solid ledge, the climber takes a break. They secure their position, replenish their strength, and check their gear. This pause doesn’t mean the climb is over—it means they’re preparing wisely for the next push to the summit.In the same way, we’re not stepping away from the markets permanently. We’re simply catching our breath, protecting the progress we’ve made, and making sure we have the resources ready for the next great opportunity. Let’s take a closer look at our strategy for each of these three key areas.

Locking in gains: let’s talk about taxes

Anytime we make a profit by selling investments, we must also realize the gains. That means some clients will have capital gains taxes this year. And while no one likes paying taxes, sometimes the benefits outweigh the tax cost.

After much research and careful analysis, our investment committee decided it’s far better to sell and take measured profits now — even with the gains — than staying invested in overheated markets. By selling off certain investments before a market downturn, we’ve protected our portfolios against potential loss down the road. Of course, we don’t know exactly when the markets will correct, but we’re preparing for it now because we believe a downturn is coming soon.

Rebalancing portfolios: the basics of asset allocation

Our clients have different goals, financial situations, investment time frames, and risk tolerances. And that’s why we build customized portfolios for clients. By carefully mapping out your investment strategy, we create an asset allocation that aligns with your unique goals and maintains diversification.

As investments change over time, your asset allocation can get out of balance. So it’s important to rebalance your portfolio periodically to restore your ideal allocation. Our recent sell-off of various investments not only protects portfolios from a potential market downturn, but it also gives us the opportunity to strategically rebalance portfolios as we thoughtfully re-enter the market.

Short-term moves, long-term focus

Our recent investment moves could be compared to climbing a mountain. Seasoned mountain climbers understand the importance of taking breaks along the way to refuel, check gear, and plan their route. Pausing doesn’t mean their climb is over. In fact, taking a short pause is likely the smartest way to ensure they achieve their goal — reaching the summit.

Similarly, our brief investment pause is part of a larger, calculated plan. We are protecting the progress we’ve already made and ensuring we have the resources ready for the next opportunity. Because these are the types of strategic moves that help keep client portfolios strong and resilient.

Building reserves: why “dry powder” matters

So, what are we investing in now? We invested recent proceeds in conservative, highly liquid instruments, earning about 5% annually. These easily accessible cash reserves and holdings are often called “dry powder” among investment professionals. This phrase, coined by soldiers centuries ago, refers to having a stock of dry gun powder available to use whenever needed.

When it comes to investing, increasing our dry powder empowers us to immediately invest whenever opportunities arise. So, if a market downturn comes, we will have the cash on hand to reinvest in the market — but at a discounted price.

Eagerly looking ahead

Markets always move in cycles. By increasing our dry powder, we’re positioned to take advantage of future opportunities and discounts. In the meantime, that cash isn’t sitting idle — it’s earning a healthy 5% return in conservative investments. If you have questions about how these recent changes might affect your portfolio or your taxes, we’re just a phone call away.

Moving forward, our goal remains the same: to steward your wealth wisely, protect what you’ve built, and prepare for tomorrow’s opportunities as we journey towards your summit.

The provided information is for educational purposes only and does not consider any individual personal, financial, legal, or tax considerations. The information contained herein is not intended to be personal legal, investment, or tax advice or a solicitation to engage in any particular strategy.

The content is developed from sources believed to be providing accurate information. Potentia and Potentia Wealth do not provide legal advice or tax services. Please consult your legal advisor or tax advisor regarding your specific situation.

Past performance is not indicative of future results, and no investment strategy can guarantee profit or prevent loss. Any forward-looking statements are based on current market conditions and are subject to change without notice.

Advisory services offered through Potentia RIA, LLC, an SEC-Registered Investment Advisor. Potentia RIA, Potentia Wealth, and Potentia are separate entities.

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