Is this not the most nerve-racking stock market rally you can remember? Despite countless reasons for concern — including political uncertainty at home, geopolitical risks abroad, high valuations and Fed rate hikes … just to get started — stocks continue rambling to new highs at a dizzying pace. What’s especially frustrating is that many investors, with a strong recollection of the financial crisis that nearly crippled markets 10 years ago, have positioned portfolios for a breakdown that has yet to occur.
One might argue that many thoughtful acts by investors have resulted in higher frustration levels. Which of the following are you “guilty” of?
- Owning investment-grade bonds
- Rebalancing winning positions
- Owning hedge funds
- Maintaining higher levels of cash
- Owning master limited partnerships
While perhaps prudent, each and every one of these actions would have cost an investor money in the recent past. Owning conservative or diversified investments didn’t pay off. Neither did thoughtfully trimming winning positions that have soared in value. Nope! By the numbers, all these sensible acts simply caused some investors to feel like losers (even though their portfolios may be performing quite well this year).
This cartoon makes us want to scream out that thoughtful, disciplined investors should never feel like losers. Yes, it can be frustrating when the S&P 500 hits record highs for 12 consecutive months (surpassing the previous record of 11 months) and when the gains seem to come without risk — this is the first year in a dozen years there have been no movements of +/- 2% days . However, market highs give us a unique, and limited, opportunity to truly optimize our portfolios.
1. Just because the market is high doesn’t mean it will soon fall. In other words, there’s no assurance that this bull market will end anytime soon. Prudent investors may grow even more frustrated, but that’s no reason to abandon thoughtful strategy.
2. Examine, or re-examine, your goals. Market highs afford investors great opportunities to revisit their risk/return profile and to adjust accordingly. We're not referring to market timing but instead to clinically review the expected return of your portfolio and consider whether you still require as high a return. Have circumstances changed? Can you tolerate a lower risk/lower return portfolio and still accomplish your financial goals? A good example of this is a client that, because their portfolio has grown considerably in recent years, is rebalancing the portfolio and reducing leverage. It’s a unique opportunity to reduce their financial risk (reducing leverage) and reduce portfolio risk (rebalancing to a less aggressive allocation) while continuing to meet their long-term financial and investment goals.
3. Stick with a thoughtful rebalancing strategy. Watching new market highs can seduce investors to stay with or even load-up on the winners and underweight target allocations in those investments that haven’t fared as well. Remember that balanced portfolios are built to perform across a variety of market conditions. Just because we haven’t seen volatility and downturns of late, certainly doesn’t mean we won’t. Disciplined portfolio rebalancing strategies, help investors seal out the noise and maintain a thoughtful approach.
So while prudent investors might feel some frustration, they never should feel like losers. We stand prepared to help clients address financial planning matters such as these. Please contact any of our professional advisors for more information.
 Schwab Market Perspectives, September 29, 2017