By Mickey Welcher
The stock market ended the month of May at a high point as the major indices broke all-time records. The most recent earnings season finished on a positive note, and unemployment is down to just 4.3 percent. The economy is looking strong moving forward.
The big question is where to go from here. It’s a very hard question to answer because the current stock market rally is the second-longest bull market in history. Many experts have been predicting a sell-off over the past two years, but that has not occurred. At some point, the market will cool off, but no one knows when.
We have been very bullish over the past few years, telling everyone to hold steady and ride this rally. For aggressive investors, we believe the time is now. While we advise against “market timing,” where folks try to guess when the market will drop, we do recommend clients with current investment allocations of 75 percent stocks or higher should drop down to 70 percent stocks and 30 percent bonds.
The way I see it, stocks are currently valued at the high end of their range, with little upside mobility left. While there’s no real guarantee of this, the price of stocks relative to companies’ earnings is historically high, which makes it harder to continue rising. Any hiccup has a great chance to send stocks downward regardless of the overall strength of the economy.
Though our recommended adjustment decreases the exposure for these particular investors only slightly, making the change will pay off significantly when the market starts to weaken or corrects. At the same time, the modification will not significantly affect your upside should the market continue to move higher in the short term.
If you are not in an aggressive allocation, we recommend keeping your portfolio allocation as is. If you are not sure, look at your allocation, ask your advisor or send us an email and we will let you know. If your portfolio is below our target, your allocation is fine the way it is.
Mickey Welcher is founder of Envestim, a low-cost financial advisory firm for anyone looking to start or manage their portfolio. He can be reached at mickey@envestim.com.