The stock market reached new highs this week, leading more and more people and money to enter the market. There are still those who, since 2008, have stayed on the sidelines and it has only been recently that some of them have decided that the market may be safe again. Two points on that: you can’t time the market, and this is bad thinking. I’m not trying to imply that it is time to sell right now; instead, I’m saying that entering into stocks simply because they have been on a steady climb isn’t logical. Your long-term investment objective should dictate the percentage that you have allocated to stocks, bonds, real estate, and everything else in your portfolio.
You certainly need to take a look at your portfolios, especially if you haven’t made any changes lately. Year to date, the S&P 500 index (large stocks) is up nearly 24%, the S&P 400 Midcap index (medium size stocks) is up nearly 27%, and the Russell 2000 index(smaller stocks) is up 30%. Assuming diversification, a 50/50 stock/bond allocation on December 31st may be up around 15% YTD, but your allocation may now be 60/40 today.
So the question for us today is this: where are we headed now in light of these new highs? Will we have a trick (the market declines from here) or treat (the market continues to rise)? The Fed is going to play a big part in that answer, and in my opinion the Fed has done a good job in telegraphing what they plan to do. I believe that Fed will not taper too early but will begin to pull back their monetary stimulus when the economy can handle it. Next comes corporate earnings; we are in the middle of earnings season right now and it has been a mixed bag so far. The consumer also has a mix of positives and negatives: food prices are increasing, while gas prices are falling.
The answer? No one knows, nor can know, what the future holds. The best way, using Halloween analogies:
- Don’t just trick-or-treat at just one house or street (i.e, stay diversified). If you aren’t already a client, feel free to call me so that we can determine your personal investment objective, and then we will invest to that objective.
- If you receive too much of some candy, trade with your friends (i.e., rebalance). As mentioned above, if you don’t have someone doing this for you, go back to your original choices and bring things back into alignment. Don’t get swayed by your emotions. For example, just because your favorite stock is up 40% this year doesn’t mean that you should hold onto it. If it has become a heavy percentage of your overall portfolio, you may want to trim it back and rebalance; otherwise, you have all of your eggs (or candy) in one basket.