ReShelle Barrett, CFP®
It seems as though the markets continue to reach new highs almost daily. And the good news is the economy is relatively healthy which to some degree supports higher market levels. For example, unemployment is very low at 4.4%, household net worth continues to climb, interest rates and inflation remain low, personal incomes are higher, etc. With that, stocks have certainly performed above long-term average returns this year. In fact, year-to-date the S&P 500 is already up almost 15% through October 30th.
Regardless of recent headlines, the market continues to climb quietly. This is not always, the case. So, given above average long-term valuations, the market gets more expensive with each new high – at least looking backwards. So now is an appropriate time to re-evaluate your overall allocation of investments. Look at how much is in cash, bonds and stocks. The stock portion has probably grown more than the safer investments so it’s a good idea to capture some of the upside particularly if you are close to or in retirement. This not only locks in some gains but also reduces the risk of a diversified portfolio going forward.
As we know, the market rewards those who take the risk in the long run. However, too much risk can certainly add volatility so be cautious. If you have money to put to work such as an inheritance or divorce settlement, proceed cautiously. Consider dollar-cost-averaging over 6-12 months into equities. That means putting a fixed dollar amount to work each month every month for a fixed period. This will allow you to buy more shares when the prices are lower and less shares when the prices are higher. Dollar-cost-averaging also reduces the risk of investing a lump sum at higher prices resulting in potential immediate losses. It also helps take the emotion out of determining when to invest. It feels better when stocks are high and worse when they are low thereby making investors want to buy high and sell low. It’s critical to overcome that temptation. We certainly wouldn’t wait for prices to go up at the mall or the gas pump to buy. The same goes for investing.
Although domestic equity valuations are currently higher, other sectors are still attractive such as global and emerging market equities. Emerging markets have been a significant driver of global growth and that is expected to continue. In fact, 70% of the world’s gross domestic product (GDP) growth over the next 5 years is expected to come from EM countries1. In addition, increasing urbanization in these countries is helping to drive growth in personal wealth and consumption. Many of these countries also have favorable demographics which can be key drivers of growth. Just keep in mind that global and emerging market equities come with additional risks including political risk, exchange rate risk, and others. Sectors like emerging markets should be in smaller amounts and not core holdings in a growth portfolio.
The bottom line is to look at the current risk and allocation of your investments and to consider shaving off some of the domestic equities. If you’re appetite for risk is higher and you have the time horizon, consider increasing your global and emerging market holdings. If not and its simply time to reduce risk, hold proceeds in short-term fixed asset classes such as high quality corporate bonds. And as always, if you’re not sure, consult an investment professional to help you determine how best to rebalance.
1 “Why Invest in Emerging Market Equities Now”, Justin Leverenz, Oppenheimer Funds