When the stock market hits new all-time highs, it’s natural to feel a mix of excitement and slight hesitation regarding actions to take (or not take). Don’t let market euphoria dictate your decisions. Focus on informed, strategic actions to manage risk and stay on track toward your long-term goals. Here are some key investment decisions to consider when markets are at all-time highs:
1. Review Your Portfolio Structure:
- Market Highs and Risk Perception: When markets perform well, your portfolio’s investment structure can drift away from your target mix. For example, a strong rally in stocks could increase your equity holdings beyond an ideal percentage or risk level. It might be wise to lock in profit on some of your strong performing assets, and redeploy sales into other investments, potentially reducing your risk exposure. Rebalancing is part of the key investment strategy to “sell high and buy low.”
- How to Rebalance: Rebalancing involves a number of considerations, including:
- What assets might be overvalued?
- Your appropriate investment risk exposure relative to your long-term investment needs and personal risk appetite.
- The proper allocation of investments among the different types of accounts you own (i.e., IRA, Roth, Joint).
- The tax impacts of investment sales and future investment income.
2. Evaluating Your Risk Tolerance:
- Personal Risk Perception: When the market is soaring, it’s easy to feel more comfortable with risk than you truly are. However, understanding your true risk tolerance is crucial. It is best to evaluate this at market highs versus market lows.
- Factors Influencing Risk Tolerance: Consider your financial situation, time horizon, and goals. Ask yourself questions like: Can you absorb potential short-term losses? What percentage of your overall wealth do large investment allocations represent?
3. Put New Cash to Work?
- How Should You Be Invested? If you are holding large cash balances, this might be a challenging time to decide whether you should put the cash to work in investments. An initial step in this decision is understanding how you should be invested for the long-term and how that overlays with why you are holding large cash balances.
- Your Need to Achieve Growth: Your allocation to cash and investments, as well as the composition of your investments, should align with your needs to achieve growth in pursuit of your goals, such as retirement. Determining if you are too conservative relative to your goals should be a driver in your decision to invest cash balances.
- Why Are Your Cash Balances High? As part of putting money into the markets, ask yourself why you have high cash balances. Is it simply because of the timing of receiving large amounts of income or an inheritance? Or are your cash balances high because of trepidation, particularly if fear caused you to sell investments? If the latter is the answer, it’s essential to develop a long-term investment strategy that includes investing cash.
- Long-Term Perspective: Investing is a long-term game and trying to time the markets can be dangerous. Historically, investors have always been rewarded by remaining invested. Additionally, stocks have historically posted positive returns in the majority of years.
4. Strategic Charitable Giving:
- Capturing High Valuations: If you are charitably inclined, this could be an opportune time to complete your charitable giving. Utilizing investment assets can optimize the tax benefits of your charitable gifts. The decision to gift investments versus cash depends upon the investments you own, your capital gains, whether you itemize deductions, your age, and the type of account.
5. Professional Guidance:
- Working with a wealth manager can help you to frame all of these points and others into a cohesive strategy to support your immediate and long-term goals. Fiduciary advisors such as SageVest Wealth Management integrate your investments and financial planning under one roof. Working with an advisor allows you to:
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- Understand how your investments need to support your goals.
- Discuss market fluctuations.
- Alleviate your need to monitor the markets or stress about making investment decisions.
- Ensure you are maximizing tax opportunities.
In Conclusion:
Reaching market highs doesn’t necessarily signal the need to make drastic changes in your investments. However, they can present an opportunity to re-evaluate your appropriate investment structure, properly manage risk, and identify opportunities. We welcome you to contact us to learn how we help you achieve your goals and elevate your wealth potential.
