The Dow closed at a record high on Wednesday after notching gains for 9 straight sessions. The broad market benchmark (^DJI) is up nearly 12% since Donald Trump was elected president, and about 5% in the past month. The S&P 500 (^GSPC) and Nasdaq (^IXIC) indexes are more than 9% and 11% higher since Nov. 8.
Much of the run-up, as Yahoo Finance has written, has been fueled by the new presidential administration’s promise to cut taxes, boost infrastructure spending and ease business regulations — all of which point to overall corporate optimism (despite some concerns over Trump’s border tax plans).
On Tuesday, all three benchmarks ended at all-time highs.
Considering these summits and the 8-year-old bull market, ordinary investors might reasonably be nervous and asking themselves — as they tend to also do when there’s outsize volatility in the market — whether they should make any moves now in anticipation of an imminent drop. We all know the good-time rally can’t last forever, especially since analysts’ expectations for earnings have been declining and valuations are stretched. And consider these reasons investors should be cautious now.
We asked a few investment managers what they’re telling their clients who might be worried that a nasty turnaround is coming to the stock market — and how they would counsel investors on how best to protect themselves when the drop comes. The guidance, not surprisingly, is similar to what investors are told during times of high market volatility – sit tight! Here’s what else they had to say.
Hold steady
“The advice to hold steady remains as good as it was during the past world wars, recessions, tech boom and bust and grand recession and other ‘unique’ times with one exception; it’s not buy and forget but buy and manage.” –Harold Evensky, a CFP and chairman of Evensky & Katz Wealth Management
“Clients have different reactions when the markets are going up. Some clients worry that the market will likely fall, while others want to get in on the action. We tell our clients not to focus on what is happening with the market, but on the factors that they can control — their earnings, expenses, and savings.” –Avani Ramnani, director of Financial Planning and Wealth Management at Francis Financial
A simple rebalancing strategy is better than none
“If your policy is 40% bonds/60% stock and with the market run it’s now 30%/70%, you should have been selling stock and buying bonds. There are many sophisticated potential rebalance policies; however, even a very simple one is better than none. For example, review once a quarter and if your portfolio is out of balance by 6%, rebalance back. It won’t feel good at the time as you’ll be selling what’s doing great and buying the loser class. Over time you will have sold high and purchased low.” — Harold Evensky
“It’s probably easy to assess what your portfolio is in terms of stocks and bonds: how much do you have in each. If you’re close to retirement, you want a more balanced approach — have 40%-60% in stocks, and cushion that with bonds. Especially if you’re spending from your portfolio, you want to mitigate any short-term swings. And adding bonds to your portfolio is the way to do that.” — Judith Ward, CFP and senior financial planner at T. Rowe Price
Raise cash if you need to
For clients who have financial obligations in the next year or so, it might make sense to sell now rather than when the money is needed. I have a client who plans to buy a car sometime this year and will need about $50,000. I sold stocks yesterday to cover this. I also have a client who is moving into a retirement continuing care facility and will need $180,000 this summer as the initiation fee. I’ve started selling now to have the funds available.” — Mary McGrath, CFP and CPA, executive vice president and portfolio manager, Cozad Asset Management
“We recommend clients raise any cash they expect to need in the next year right now to take advantage of the upward move in the market.” — Randy Carver, president of Carver Financial Services
And of course, don’t try to time the market
“I’ve never found market timing to work. I’ve even had a few clients try to do it and they have all failed. That being said it doesn’t mean one shouldn’t pay attention to the effect the run-up in the market has had on his or her portfolio. The first thing to consider is rebalancing. It is possible the allocation to equities is higher than the investor’s risk tolerance would allow.” — Mary McGrath
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