Do nothing Who says that you have to pay attention to what markets are doing? In fact, most academic research suggests that the best action to take whenmarkets keep pushing up against all-time highs is no action at all. Instead of letting market movements or economic events or investor sentiment dictate your investment strategy, put your strategy first, and keep to your long-term financial plan. True, such an approach does take a fair bit of discipline and “intestinal fortitude.” Which sometimes makes the “do nothing” approach a lot more viable in theory than it does in practice – particularly when the downturn is severe and long-lasting. It’s one thing to refuse to pay attention to the crowd in good times. It’s quite another to do it when the financial world seems to be in chaos, when well-established companies are struggling to survive and when everyone else is selling their stock portfolios – a situation we last saw back in 2008. Gradually take profits and build up cash One common scenario in an extended bull market is that market “darlings” tend to become wildly overpriced. These days, the darlings are obvious and well-known: the so-called “FANG” stocks, including Facebook, Amazon, Netflix, and Google, along with associated companies in related technology, e-commerce and similar businesses. With these positions, it makes sense to take at least somemoney off the table. Instead of letting your winners ride, you gradually sell portions of investments that have performed exceptionally well, eventually bringing your exposure down to a level that’s more in keeping with your risk tolerance. You could do the same with your overall equity portfolio, gradually bringing it down to a more reasonable percentage that’s aligned with your long-term allocation strategy. To be clear: you’re not selling because you don’t believe in the underlying businesses – indeed, the FANGs and related stocks represent some of the strongest businesses in the corporate world today. It’s just that their stock prices have seen a significant, lengthy run-up, to the point at which their prices are out of whack with the inherent value of the businesses themselves. Taking profits is not a “bet” on which way the market is going ‒ it’s more about asset allocation. Instead of reinvesting the proceeds into another equity opportunity, keep the proceeds in cash for the time being. This allows you to build up your “dry powder” for taking advantage of investment bargains if the expected downturn actually happens. Yes, such a strategy may cause you to miss out on the last little bit of gains if the market keeps marching ever higher (and it might, at least for a time). But the ability to provide yourself with downside protection, should things go the other way, may be worth the trade-off. Approach speculations with caution One sensible way to protect yourself when markets seem to be overextended is to take extra caution when entering speculative, “high-risk, high-return” positions. Such positions have historically been the ones to fall first if things suddenly take a turn for the worse. Now is probably not the time to be borrowing money to invest in Bitcoin or other cyber-currencies, for example. Or perhaps youmight want to think carefully before you lay down serious money in cannabis stocks. Or in any small high-tech startup on the Venture Exchange. Or the FANGs, as we discussed above. That’s not to say that these are “bad” investments in and of themselves – it’s just that you might want to double- or triple-check your investment thesis, to make sure that it still makes sense if the market suddenly takes a 20% haircut. Finance What should you do instead? OK, so you know that you probably shouldn’t try to time the market. But what do you do instead? When the market continues to set records, when more and more pundits are wondering whether the good times can last, when more and more analysts are suggesting that stocks are simply “too expensive” – what action should you actually take? Here are some options: 36 | www.snowbirds.org
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