Looking at your investment statements these days probably feels like pure ecstasy. Who doesn't like making money? If only these days could last forever…
How quickly we forget the bad times we slogged through to get here. The Great Recession from 2007 – 2009 and Dotcom Bubble of 2000 feel like a distant memory. Ancient history even. We humans suffer from recency syndrome: we assume our most recent experiences will continue into perpetuity. They become our new normal. We forget the past.
I know I sound like a wet blanket, so let's pivot and focus on four proactive considerations taken by a smart investor during a bull market:
- Remain Diversified
We all want a portfolio comprised of winners. The problem is that no one knows what asset classes will outperform from year to year. That's why it's important to remain diversified. One of the realities of diversification is that something in your portfolio will always be underperforming. Diversification wins in the long run; however, you must accept losers in the near term.
- Confirm Your Risk Target and Rebalance to that Target
Are you approaching retirement? Have your life circumstances changed? Are you taking more risk than necessary to reach your goals? If so, now might be the ideal time to reduce risk in your portfolio to lock in gains and realign your risk tolerance with your revised financial plan. If your circumstances have not changed, now is still good time to review and confirm the desired level of risk in your portfolio and rebalance to that target. As stocks increase in value, the percentage of stock in your portfolio increases as well, skewing your overall risk target. Rebalancing trims asset classes that have outperformed back to the desired target, effectively forcing the portfolio to lock in gains. It might seem counterintuitive to sell assets that have performed well, but that is exactly what a good investor does: buys low and sells high.
- Plan for Any Short-Term Cash Needs
Consider any major purchases or significant cash expenditures that lie ahead in the next 12 months. Now might be the time to monetize investments for such expenditures. If you raise the cash now, could the market go up in the meantime? Sure. But it could also go down. For most humans, the pain associated with loss outweighs the pleasure associated with gain. Especially when it comes to something as important as financial security.
- Remain Grounded in Your Financial Plan
Money isn't a goal in itself; it's a tool to accomplish financial independence. Examine what financial independence means to you and how to achieve it while taking on the least amount of risk necessary. Now is the perfect time to revisit your financial goals, update your financial plan and confirm proper coordination with amongst your assets. Always remember that planning comes first, investing comes second!
Nicole Gopoian Wirick JD, CFP® is the President of Prosperity Wealth Strategies, a business she founded to focus on providing a high touch, concierge style approach to financial planning. Call today to explore how she can help you achieve prosperity.