CNBC: Managing risks to the rally Monday, 6 Mar 2017 | 2:11 PM ET | 03:13
Stocks are struggling to get out of the red. The Dow Jones Industrial Average and S&P 500 posted their first back-to-back declines since January over the first two days of this week. Pundits and hedge fund managers are worried about a rally that’s overheated — using varying degrees of “bloodbath” hyperbole and more measured hedging strategies — some see a pullback of at least 5 percent to 7 percent coming. But here is what worries me: the concerns expressed by individual investors. The number of calls I receive from 60-plus people about a potential correction happen every so often. But the pace has definitely picked up a bit lately.
So what if we’re in a stock market bubble that’s about to pop?
Regardless of an asset allocation that is presumably appropriate for your risk tolerance, a drop in stocks would certainly be more than enough to blow a big hole in your income planning. And you would feel even worse, because you convinced yourself that you learned your lesson twice — the market crashes in 2000 and 2008.
Now is the time to answer a simple question: How do I reduce my risk without giving up on more potential upside?
You can’t hold on to upside potential if you go to cash. But you can temporarily move to cash while deciding on your next portfolio moves. Look, consider yourself lucky to be able to have recent profits to park in cash, especially if you said during those last two crashes, “The next time I get back to where I was, I’m getting out!” Taking profits after a big run is not the same as being under-invested or missing out on the market. Plus, the Federal Reserve is sending the strongest signals yet that it is determined to raise short-term rates more aggressively.
Less risk means less return, but all cash would mean no opportunity. So even if you have the market jitters and the only way to get comfortable is by moving to cash, make it a brief stay and come back into equities with a lower risk profile by rebalancing.
Odds are that over the last eight years, your risk tolerance if you’re over 60 probably went lower, not higher. If you have passed on the opportunity to rebalance, you are most likely complacent. That’s the enemy of all investors just before they’re body slammed by the next bear market. Whether you are invested in individual stocks, concentrated in sectors or have a broad-based mix of equities, bonds and other asset classes, rebalancing is mission-critical for all investors.
If your equity, cash and fixed-income ratios are outside of our original asset allocation because your stock portion went up a lot, it’s time to bite the bullet and get back to that. Make sure you’re properly diversified within your stock holdings. As specific stocks and sectors have risen mightily, pare those back and move into sectors that haven’t had as high a move. This way, you’re still in stocks but you’re effectively staying in stocks while you rebalance.
“If you have passed on the opportunity to rebalance, you are most likely complacent. That’s the enemy of all investors just before they’re body slammed by the next bear market.”
There should be no sacred cows; any great company can run into business problems, which could plummet its stock. I always use Lucent as an example. It was considered a must-have and can’t-miss stock that was widely held by investors. It went from more than $100 to under $1 when the tech bubble burst.
One last thing. Please scrutinize your portfolio for any investments that are not plain vanilla. The end of bull markets, in my experience, are often signaled by the invention of esoteric and exotic investments that sound good but are really a mix of ordinary stocks and bonds mixed with leverage to give you “enhanced” and “select” returns. If you’ve recently put money, or been advised to put money, into an investment that is very narrow, or you simply don’t understand, get out.
I’ve seen a lot in my 27 years of being in the securities industry, but I’m smart enough to know that I haven’t seen it all. None of us have. But a focus on plain vanilla investments and rebalancing after a run like this, as simple and quaint as the advice might seem, are what has helped me to keep my clients in good shape for a heck of a long time.
I’m not stopping.
— By Mitch Goldberg, president of investment advisory firm ClientFirst Strategy