As the stock market keeps reaching all-time highs, perhaps you’ve thought about getting in the game and grabbing your share during market pullbacks. Beware! Investment decisions during periods when all the easy money has been made are challenging because the biggest enemies in money management – fear and greed – influence your decisions most at times like these.
With a bull market now well into its eighth year despite frequent threats of a looming correction, how can you avoid making rash decisions?
Don’t gamble with short-term market movement. There are principles of wise investing that you can apply when rising markets tempt you to deviate from your long-term plan:
What’s Your Strategy?
Write down your strategy investment strategy. Whether you are accumulating assets or spending down your savings, you should pick a stock to bond allocation sprinkled in with different asset classes like large, mid, small, and international developed and emerging. You should also track your portfolios progress against the target return of your financial plan. This is a common practice of large investors who are serious about keeping their money aligned with their goals.
How to Evaluate.
When evaluating investment progress with this framework in mind, you know when your holdings should be rebalanced back to the previous levels you were comfortable with, given their balance of risk and return prospects. An investment plan reminds you to counter the manias and panics of gains and losses. It also helps you made decisions that let the pressure out of emotional stress with a buy-and-hope investment strategy. Rebalance! I prefer a using Opportunistic Rebalancing.Â
Realize gains.
When rebalancing your assets, you sell those that do well and grow to a higher percentage of your overall portfolio than originally intended and collect your profits.
Sure, it can be tempting to let winners keep running. You wouldn’t be alone in worrying about cutting off a rally short of its peak. But rebalancing doesn’t call for wholly moving out of investments. While some individual holdings may be outperforming the market as a whole, they won’t outperform persistently. Bring the size of your growing investment down to what it was at the beginning of the year.
If it was a comfortable size then, it should still be appropriate. This way, you remain invested if those holdings continue to perform well, and you also lock in some profits.
Selling might create capital gains taxes if the investments are outside of a retirement account, but don’t let the tax tail wag the investment dog. Tax efficiency matters, but realizing your gains matters too. Ask your fee-only planner when it’s right to capture gains. You’ll be a happier investor when you ultimately get to use those gains toward your goals and life experiences.
Diversify.
If you need cash to support spending or to pay down debt, realizing gains is natural. But if you’re simply rebalancing, keeping the same ratio of investments, it is difficult to sell what does well when other options are not screaming buys.
Nevertheless, take this chance to broaden your investments. For example, if U.S. stocks don’t appear to be on sale, international stocks may be trading at more attractive values. If your rebalance suggests that you need to take from stocks and add to bonds, consider diversifying beyond typical bond holdings.
Takeaway.
Investing is a disciplined process. Whether it is bull market or bear market, what should lead your strategies are discipline and defined goals – not fear and greed. If you find it difficult to adopt and follow a systematic investment plan, seek a good advisor.