How should you be handling your investments amidst these all-time market highs? 

As the Dow ended the week over 25,000, some people have asked me, “Jim, should I be pouring more money into the stock market, specifically in US stocks?” Others have said, “Jim, there’s got to be a correction right around the corner.” Bottom line, nobody really knows what is going to happen, especially in the shorter term. So, I have three tips on how to manage your investments amidst these new market highs.

  1. Be sure that you are properly balancing risk and reward. Do you have the right balance in your investments? You should be measuring your risk. What is likely to happen next time we have a correction or bear market? We can measure that to some degree of confidence. We can certainly never be 100% confident with stocks, but we can measure the different balance of investments in our portfolios and balance risk and reward. Meaning, if you want less risk, you are probably going to have to have less sub-side reward potential. But then you can balance that. We plan for risk before it happens, not while it is happening. Right now is a great time, in my view, to review the risks inherent in your portfolio with stock markets at all-time highs. Most people of retirement age that I meet with are way off the map in what their understanding is of the risk inherent in their portfolio in some form, be it market risk or inflationary risk.
  2. Be wary of bonds, especially traditional US bonds. Most people balance risk by buying traditional bonds. Historically, the way that serves most people in a portfolio is that when markets get chaotic, people rush to the safety of bonds. So, that helps you in the short term. But in the long term, traditional US bonds is an asset class that, in my view, is just not going to do very well. Interest rates are either going to stay really low, where bonds aren’t yielding much, or interest rates are going to go up, and bonds will do even more poorly. That doesn’t mean that you shouldn’t have any in your portfolio, because in the shorter term, you need some of those hedges. However, there are other ways to hedge portfolios for minimizing risk on the downside without buying an asset class that, more than likely, is doomed to failure over the next 10-15 years.
  3. Use time as an effective hedge to market risk. Time is one of the best hedges to market risk in the long haul. When you’re in retirement, you may think, “Well, Jim, I don’t have time, I need income now.” But you can create time as a hedge in your income plan. I believe you should pool your investments based on when you’re going to draw from them. Investments that you’re going to draw in the next 5 years should be very safe and secure. You know that money is going to be there and you’re not gambling on the market. With investments you know you won’t touch for 5-10 years, you can take some conservative risks. And then with those investments you won’t need for 10+ years, you can take more of a moderate amount of risk. With this strategy, if you know you’re not going to touch that money for 10 or more years, you’re not as worried that a market correction is right around the corner. Building time as a hedge with your retirement portfolio with your income plan is such a critical component of retirement planning, and is essential for long term income security.