Aug 20, 201510:45 AMOpen Mic
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Should you “pull back” from a bull market?
In early 2015, the current bull market hit a milestone when it became the fourth-longest run-up since World War II. But such a long-running rally presents investors with a dilemma: Should they stay invested and hope for more profits, or cash out to “lock in” gains?
That isn’t an easy question to answer — and it’s especially hard this time around, when the investment gains have been so substantial. Consider this: The Standard & Poor’s 500 index has more than tripled since it bottomed out in early March 2009, which means that a $10,000 investment at that point would now be worth more than $25,000. So, if you owned an equity portfolio that mimicked the S&P 500 during that period of time, or even just held a diverse group of stocks, you probably did pretty well over the past six years.
Furthermore, the key factors that have contributed to this bull market — low interest rates, low inflation, and generally strong corporate earnings — are still at play. But change appears to be on the horizon. Although economic growth has been slower than anticipated in recent months, expectations are that it will again speed up, allowing the Federal Reserve to raise short-term interest rates later this year. Uncertainty over the timing of this rate has been unsettling for both stocks and bonds.
Given the sheer length of the bull market, it’s not surprising that some analysts think we are overdue for a “correction” (a 10% decline in the market over a relatively short period of time). Yet, it’s almost impossible for anyone — even the so-called market “experts” — to predict when it will happen. And since that’s the case, you’re better off not worrying about when, or if, you should pull back from the market to consolidate your gains. Instead of trying to “time” the market, ask yourself some basic questions:
- Am I properly diversified? You can’t control the external events that affect investment prices — but you have total control over your own portfolio. And the best way to position your portfolio for all markets is to ensure that it’s properly diversified. At any given period, stocks may be moving up while bonds are down — or vice versa. If you only owned stocks, and the stock market stumbles, you will likely face big losses. But if you spread your investment dollars among domestic and international stocks, different types of mutual funds, corporate, municipal, or government bonds, and other vehicles, you can reduce the impact of volatility on your holdings and give yourself more chance of success.
- Am I taking on too much risk — or too little? If you consistently become frustrated by short-term declines in the financial markets — and the accompanying results on your investment statements — you might be taking on more risk than the amount with which you’re comfortable. If that’s the case, it may make sense for you to shift part of your portfolio from growth-oriented stocks to other vehicles, such as bonds or slower-growing, dividend-paying stocks. This move may provide you with some peace of mind, but you will also have to accept that your overall returns are likely to be lower. Conversely, if you are unsatisfied with your portfolio’s performance, and you know that you need more growth to achieve your long-term goals, you might need to shift some assets from more conservative investments into more aggressive ones. Ultimately, you need to balance your risk tolerance with your hoped-for returns.
It’s a good idea to ask these two questions in any economic environment. In doing so, you keep your focus on the “basics,” such as diversifying your holdings, being aware of your risk tolerance, owning quality investments, and so on. This way you can continue making progress toward your long-term goals — in up, down, and “sideways” markets.
Beth Norman, CFP, is an accredited wealth manager and financial advisor with The Droster Team, and first vice president for RBC Wealth Management.
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