By keeping some of your money in cash or cash equivalents (such as money market funds), you can reduce risk, stay flexible, and have more money to put into the market after a drop.
For many investors, the current go-go stock market is a cause for joy. But for others, it’s an ironic source of anxiety.
As of mid-December, the Dow Jones Industrial Average hit 84 new market highs since November of 2016. And the markets have continued to set new highs as we march toward the end of the year.
While many investors welcome these highs, more wary investors — physicians among them – fear a sudden, steep decline. Still haunted by the specter of the devastating drop of 2008, they have reservations about investing.
Many analysts aren’t discounting a correction (defined as a sudden decline of 10%) or at least a lesser drop, a pullback. On average, in recent years there has been a correction about every 18 months, and the last correction in the S&P 500 ended in February 2016. And there have since been 2 shallow pullbacks: 1 of about 5% before last November's election and another of about 6% associated with Brexit vote in June 2016.
An overdue correction doesn’t daunt many investors feeding the ascending DOW, but the skittish among us may focus on some analysts’ comparisons of this market with Icarus — the figure in Greek mythology who met his demise by flying so high that his wax-covered wings were melted by the sun. Any market that flies this high, goes the logic, is perilous, though these analysts do back up this classical analogy up with historical market analysis and statistics.
Regardless of your view of what the market will do, there are some perspectives and measures you might want to consider:
Sectors that tend to do well during the later stages of a business cycle include materials healthcare and energy. The new tax law, which passed Congress in late December, may benefit some sectors more than others, so you may want to consider these firms accordingly. Those benefitting might include large tech companies with substantial piles of cash parked overseas, banks, airlines, railroads and energy firms. In addition, small-company stocks that currently tend to pay higher-than-average tax rates could also do well.
By managing your stock market risk these moves, you can help protect your portfolio—whether you’re a stalwart bull or a Chicken Little.
Eric C. Jansen, a Chartered Financial Consultant, is the founder, president and chief investment officer of Westborough, Mass.-based AspenCross Wealth Management, which provides fee-only retirement-income planning and investment management services for high-net- worth clients nationwide.
Registered Representative/Securities and Investment Advisory Services offered through Signator Investors, Inc. Member FINRA, SIPC, and Registered Investment Advisor. AspenCross Wealth Management is independent of Signator.