What Should You Do When Markets Hit New Highs?
2016 began with a bang (in a bad way) — with the stock market falling in a hurry. In fact, it was the worst 10 day start to a calendar year in history. From the beginning of the year to January 15th, the U.S. stock market (as measured by the S&P 500 Index) had dropped over 8%. The S&P 500 hit its low for 2016 on February 11th, 6 closing at 1829.08, a decline in excess of 10.5% for the year.
But just as swiftly as the market fell, it recovered with even more resilience and speed. It may be hard to believe, but now in mid-August, the U.S. stock market has been fluctuating around all-time highs. In fact, all three of the major U.S indexes, the Dow Jones Industrial Average, S&P 500 Index, and the NASDAQ, all hit record highs simultaneously on August 15, 2016. The last time all three indexes reached new highs at the same time was back in 1999.
The chart below presents the year-to-date performance of the S&P 500 Index (which tracks the largest U.S. stocks) through August 15, 2016.
So what is an investor to do when the markets hit new highs?
Rebalance your portfolio
As stocks have increased in value, you may find your portfolio a bit out of whack. A portfolio that consisted of 60% stocks and 40% bonds a couple years ago, may very well consist of 70% stocks and 30% bonds today. Rebalancing can help realign your holdings. Much like you check a carton of eggs for cracks in the store before you buy them — you need to lift open the carton on your portfolio and check for any cracks or changes.
Rebalancing your portfolio to a pre-established asset allocation target will involve trimming your winners and buying some asset classes that haven’t performed as well. It is a disciplined way to sell high and buy low.
When the market is “on the escalator up” it’s easy to forget that the market can also fall in an instant. Don’t let your emotions trick you into taking on more risk just because the recent stock market performance has been favorable.
Stick to your long term plan, even though it may be tempting to chase good short-term performance.
Although the U.S stock market is at an all-time high, international markets are not. It is important to stay diversified and to not become an investing homebody. Oftentimes the world markets are a seesaw — with one side up and one side lower.
Many investors seem to panic more when the market is at a high than when the market is at a low. The “should I just go to cash now” question can begin to creep into our heads.
Keep in mind the stock market regularly hits all-time highs. In fact, between 1983 and 1999, the Dow Jones Industrial Average, S&P 500 Index, and NASDAQ indexes hit all-time highs at the same time 148 times. This is not uncharted territory.
Attempting to time the market is extremely tough to do, and those who try it often find themselves in financial pain.
Appreciate the appreciation
If charitable giving is a goal of yours, take a look at any appreciated securities in your portfolio to accomplish your giving plans. Gifting highly appreciated securities may be a good way to support your favorite charity while receiving a higher tax benefit in the process. Not only do you receive a potential tax deduction for the stock you gift (if you itemize your taxes), but you also forego paying any capital gains taxes on the appreciation of the gifted stock.
Market highs can be great for your portfolio, but as you can see from the examples above, market highs also remind us that thoughtful planning and disciplined action are required for long-term success.