Wall Street’s decade-long surge raises a reasonable question for many people. Is it time to take some money off the table? Here’s a checklist to help you decide.
Updated: Oct. 24.
It may be time for a gut check.
A decade-long bull market in stocks is hitting a difficult patch. On Wednesday, just weeks after stocks hit a new high, the benchmark Standard & Poor’s 500-stock index erased all its losses for 2018.
For many investors, that raises a reasonable question: Should I be taking some money off the table?
The answer is the same as it always has been: If you have a well-constructed financial strategy, and your personal circumstances have not really changed since you put it in place, there is probably no reason to do anything at all.
If, however, you think you will be tempted to unload a chunk of your stocks now that the market has tumbled sharply, then a new plan or tweaks to the one you already have could make sense.
“Many people feel that they only have two options: Invest or not invest,” said Nicholas Scheibner, a financial planner with Baron Financial Group. “However, you have a third option — adjust.”
There are some glaringly obvious facts that bear repeating. Your investment portfolio is not the stock market — at least it shouldn’t be, unless you are 22, just starting out and have only 10 percent of your money allocated to a more stable investment category like bond funds. If the market plunges, your portfolio, if spread across a diversified mix of stocks and bonds, should not necessarily drop in tandem.
During its last big downturn, in 2008 and 2009, the stock market plummeted roughly 50 percent. An investment portfolio evenly divided between stocks and bonds would have lost nearly 29 percent of its value in that time, but it would have taken only about a year to recover, according to an analysis by Vanguard. A portfolio that was 100 percent stocks — and lost about 55 percent — would have taken about three years to recoup its losses.
Still, even the most rational investors among us — particularly those who need to tap into their portfolio within the next few years, for college tuition, buying a home or retirement — may feel a need to satisfy that itch to do something now that the market, after reaching such a lofty level, has begun to tumble.
But what? Here are five ideas:
Your tolerance for risky investments, including stocks, should be built into your overall approach from the start. But circumstances and needs can shift over time. So it is worth considering whether your tolerance has changed, not with respect to the perceived level of the market itself, but in terms of what sort of drop you could tolerate, regardless of current market conditions. How did you feel during the market plunge 10 years ago? How did you react?
“If a 30 percent drop in the stock market would cause a loss in a portfolio that the investor knows they cannot stomach, they have too much exposure to stocks,” said Doug Bellfy, a financial planner in South Glastonbury, Conn. “But this test is valid, regardless of where the experts think the market is at any given time or guess it will be in the near future — and it is a guess.”
Responsible financial advisers have a mantra: Don’t take on more risk than is necessary to reach your goals, whether it is the amount of money you think you need for retirement or for your child’s tuition.
“For many who have invested wisely over the last 10 year bull market, they no longer need to be heavily invested in stocks,” said James Sweeney, a financial planner in Lehi, Utah. “Their portfolio has grown to the point that they can reduce the risk and still meet their retirement goals.”
That might mean slightly scaling back the slice of a portfolio allocated to stocks based on individual circumstances. The percentage will not be the same for everyone, and it is a delicate balance: You do not, for example, want to become invested too conservatively as you approach retirement; your portfolio might need to last three decades or more. That means you will need enough stocks to help your money grow and keep pace with inflation.
If you have an imminent need for cash but your money is tied up in stocks, now might be a good time to shift into something conservative, particularly if the need is likely to arise in five years or less. If you expect to buy a home in that time, you will need all that money at once. If you are paying a tuition bill, you will probably only need a quarter of your savings a year over four years.
“The more concentrated the outflow, the more important it is not to have your money at risk to satisfy near-term goals,” Mr. Bellfy said.
Retirees and people on the cusp of retirement have the most to lose if the markets come tumbling down. In such circumstances, keeping a year’s worth of basic living expenses in cash may be helpful as a long-term strategy. It can keep retirees from locking in losses by having to sell investments when they are down.
Alex Doll, president of Anfield Wealth Management, suggested that retirees determine how much they needed to cover expenses for the next six to nine months, and how much would come from their portfolio to augment other income, like Social Security or a pension. This usually amounts to about 2 percent of a portfolio, which Mr. Doll said was generally not enough to derail a larger retirement strategy.
“This helps clients mentally as they know that their spending for the next six to nine months is safe in cash no matter what happens to the market,” he said.
If a financial professional or an automatic service is not already performing regular maintenance on your portfolio, now may be a good time to do it yourself. As markets rise and fall, the mix of investments you originally put into place can take a different shape. A portfolio that was supposed to be composed of 50 percent stocks may have risen to 55 percent over time.
To protect your gains, investors should consider selling investments that have ballooned beyond their initial target and reinvest the proceeds into the side of the portfolio that has shrunk, relatively speaking. Rebalancing is counterintuitive — selling winners, buying losers — but it helps rein in the amount of risk you are taking on.
Because most of us are not in a position to determine precisely when the mood of the markets will shift, it pays to focus on the things we can control: how much we spend, how much we save and what we pay for our investments, which is easier than ever to do .
