Now that the U.S. stock market has recaptured most of its losses from 2018’s fourth quarter, many investors are breathing a sigh of relief. From its lows on December 24, the Standard & Poor’s 500 Index jumped 18 percent through the end of February. The index is now within striking distance of a record high.
It’s stunning how the consensus outlook has changed in just a couple of months. When the stock market was taking a nose dive late last year, some economists were predicting a dreary 2019, if not a downright recession. Many market participants were worried about the Federal Reserve’s intention to continuing hiking rates, new China tariffs were on the horizon, and the outlook for 2019 earnings was turning bleak.
Now that the Fed has softened its stance on near-term rate hikes and our leaders appear optimistic about the outcome of U.S.-China trade talks, some of those concerns feel like a distant memory. While U.S. economic growth is expected to slow this year, most experts still expect it to outpace the majority of other regions in the world.
The recent rebound is certainly good news; but it may also may be a wake-up call for many investors. If December’s sinking stock market caused some sleepless nights, now may be a good time to evaluate your tolerance for a possible bumpy ride in the future. Eventually, the economy will falter and enter a recession, which will likely send stock prices lower. When that happens, it will be too late to begin selling stocks that will drag down your overall portfolio.
To protect the gains we’ve experienced so far in 2019, now is a good time to assess your investment strategy and make any needed adjustments. Here are six recommendations to consider in achieving that goal:
- Rebalance your investment portfolio to reflect the right mix of stocks and bonds. For example, if your overall goal is to invest 60 percent of your portfolio in stocks and 40 percent in bonds, the rise in equities has likely tilted it too heavily toward stocks. If that’s the case, any downturn in stocks will have a bigger impact than you’d planned for. Instead of getting greedy, stay disciplined and trim the percentage in stocks to get back to your target.
- Maintain a diversified portfolio. The values of many stocks are quite high. These stocks are expensive, so avoid the temptation to jump in and invest in stocks that are wildly popular; at some point, even the fastest-growing companies experience a slowdown in revenue and earnings growth. When that happens, you can scoop them up when they are on sale.
- Establish a range for the percentage of your portfolio that consists of stock and consider moving toward the lower end of that range. For example, if you are comfortable with 50% to 70% of your portfolio in stocks, today’s high valuations would suggest moving toward the bottom of that range.
- Consider investigating companies or markets that have lower valuations than the broad large markets such as the Standard & Poor’s 500, which is at times dominated by a relatively few big companies. Also, many foreign markets have not risen as much as the U.S. markets, and therefore some are more attractively priced.
- If you are retired and are making regular withdrawals from your investments, consider keeping enough money in cash and short-term bonds to cover your expenses for two to three years. This strategy can offer protection when there is a downturn in stock prices. You will not be forced to sell investments at a lower price to provide income, giving you more security to ride out any storm.
- If you have excessive debt, use gains from the run-up in stock prices to pay down some or all of it. Paying off a large amount of debt will improve your personal balance sheet and save money by reducing interest payments.
All of us want the peace of mind that comes with a sound, long-term investment plan. When times get tough, we don’t want to be scrambling to react to the latest piece of bad news in the stock market. To avoid that scenario, take time now to review your plan and make sure it’s the one that makes sense whether the economy is good, bad or ugly.