Stock Market Highs – What do I do Now?

The stock market had a strong year in 2017, with many of the major averages at or near all-time highs by year-end. The new year has started off with continued strength. The Dow Jones Industrial Average closed above the 25,000 level for the first time on January 4.

This makes for great headlines in the financial press and for much conversation on the cable financial news channels. What does this mean for you the average investor?

Take stock

The start of a new year is always a good time to take stock (pun intended) of where you are. This certainly means a review of your investments in terms of your current asset allocation versus your target allocation.

With the gains in the markets not only during 2017, but since the market lows of early 2009, your portfolio might be over-allocated to stocks if you haven’t been rebalancing on a regular basis. This could mean that you are taking more risk with your portfolio than you might have intended to.

Taking stock also means taking a look at where you stand relative to your financial goals such as retirement, college for the kids or other goals. Have the gains on the stock portion of your portfolio pushed you ahead of schedule to reach your goals? Might it be time to dial down the risk in your portfolio?

Rebalancing

Rebalancing means adjusting your allocations to stocks, bonds, cash and the various sub-asset classes (large cap stocks, small caps, international as well as various types of bond holdings if applicable) periodically to ensure that your portfolio is invested based on a target allocation that is appropriate for your goals, time horizon and risk tolerance.

In many cases this might mean selling holdings in asset classes that have outperformed, such as stocks in recent years, and moving that money to other asset classes like bonds in order to bring the portfolio back in balance.

Rebalancing can be done in tax-deferred accounts such as IRAs or your 401(k) in order to minimize the tax impact. Additionally, new money invested in a taxable or tax-deferred account can be directed to areas that are under represented in the portfolio as well.


Updating your financial plan

This is a good time to revisit your financial plan. You should do this every year or so, but especially on the heels of major gains in the markets. As mentioned above, the gains in the markets may have pushed your portfolio to the point where you are ahead of pace to achieve your financial goal(s), a good thing certainly.

Think long-term

Nobody knows when the stock market will correct itself or how severe that correction will be. While we are not in the habit of predicting the future, we are certain that the stock market will correct itself here at some point.

According to JP Morgan: “The current bull market for stocks that began after the market lows in March of 2009 has lasted 105 months through the end of 2017. This compares to the average duration of 54 months for ten major bull markets dating back to 1926. The average bear market lasting 24 months with an average decline of 45% in the S&P 500 Index.”

Trying to time the market has proven to be a fool’s errand over the years. A better approach is to position your investments for the long-term based on your age, tolerance for risk, your goals and your time horizon for the money. This might sound boring and like advice you’ve heard in the past, it is consistent with what we’ve been telling our clients for years.

The worst thing for most investors to do is ignore their portfolios and “let the gains ride.” During the financial crisis of the last decade the financial press was filled with tragic stories of investors, many nearing retirement, who sold out of stocks near the bottom of the market. In many cases these investors suffered significant losses in their retirement portfolio and saw their retirement dreams dashed.

The better strategy in our opinion is a portfolio that fits your financial situation and dovetails with your financial plan. Give us a call to review your portfolio and your financial plan. We’re here to help.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly

Asset allocation does not ensure a profit or protect against a loss.

Rebalancing a portfolio may cause investors to incur tax liabilities and/or transaction costs and does not assure a profit or protect against a loss.

The Dow Jones Industrial Average is comprised of 30 stocks that are major factors in their industries and widely held by individuals and institutional investors.

Gardner Sherrill

After 17 years as a High Net Worth Private Banker I opened my firm in 2012 to create an unbiased and client-centered wealth management firm. As an independent advisor I can now solely focus on helping clients define and pursue their unique goals. Read More

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