The media is quick to tout that the stock market is at an all-time high. Then they paint a picture of doom and gloom with the smallest dip. Which has people emailing and calling us daily asking, “Should I sell my stocks?” It is a reasonable question. The Standard & Poor’s 500 Index has grown more than 300% percent since hitting bottom in early 2009, and people want to know if it is time to be a bull or a bear.
“(Investors) should try to be fearful when others are greedy and greedy when others are fearful.” —Warren BuffetClick to tweet
The wisdom of experience tells us that 91.5% of the difference between one portfolio’s performance and another’s are explained by asset allocation. (stated by the CFA Institute) In other words, it is NOT timing the market; rather it is the time IN the market. If you’ve invested with the help of a CERTIFIED FINANCIAL PLANNER™, your portfolio should already reflect this philosophy.
Even so, if you’re looking to actively buy low and sell high, there are trading methods you can follow (stop loss and trailing stop loss, for example) which may help minimize your risk in when it comes to certain stocks. If you’re invested in mutual funds, the fund managers may already be following this course of action.
If your investing strategy does not include professional help, and you are more of a DIY investor, I highly suggest taking the time to educate yourself about modern portfolio theory. Additionally, if you are not a big risk-taker, this particular theory is designed to minimize your risk while maximizing returns.
When helping my clients answering this question, there is a list of questions I ask them to answer first:
#1. How do you want to divide your portfolio between equities and fixed income (aka stocks and bonds)?
#2. How much of your portfolio should be domestic? How much should be foreign? If most of your portfolio is invested overseas, then the S&P 500 might not mirror your position at all.
#3. What is your investing time frame? Will you need the money in 10 years; when your kids go to college; in 30 years; when you retire; or in the next few months for a more immediate need?
#4. Have your goals changed since the last time you examined at your portfolio? If so, this might indeed be a good time to sell some of your stocks and do some rebalancing.
#5. What is your risk tolerance? How would you react to a falling market similar to what we experienced in 2008? If you have nerves of steel, we might go in one direction; however, if you envision yourself lying awake at night while your mind spins out of control and your stomach does flip-flops, then you may need to choose a very different course of action.
RELATED ARTICLE: Understanding Your Personal Risk Tolerance in Investing Strategy
Warren Buffet stated, “Investors should remember that excitement and expenses are their enemies. And if they insist on trying to time their participation in equities, they should try to be fearful when others are greedy and greedy when others are fearful.”
But of course, the rest of us are not Warren Buffet. There are indications that consumer confidence in the market was falling in early 2014 and the bears were gaining prominence. That tells me, as a financial planner, that it’s time to sit down with my clients and talk to them about their feelings.
If you’re worried, or if you haven’t had a professional reassess your portfolio with you lately, get in touch with your CFP® today. If you don’t have a CFP® read this post I have written for you to learn how to choose one.