The stock market has been on a tear since the S&P; 500 reached its low point at 677 on March 9, 2009. The index has risen 94% off of its lows. While the index is still below its October 2007 peak, this rapid and dramatic increase has allowed many investors to recover all or most of what they had lost during the downturn.
While the market run-up has been great, you may be asking yourself, what do I do now? Three thoughts for your consideration:
1. Review and if needed rebalance your portfolio. This should always be at or near the top of any investment to do list, but in this type of market rebalancing is vital. Given the market’s run-up, your portfolio is likely overweight in equities. While it is tempting to let your winners run this can greatly increase portfolio risk and potentially result in oversized losses when the market retreats.
2. Review how you are tracking towards your broader financial planning goals. The market downturn set many investors back in terms of their progress toward goals such as retirement or saving for college. Likewise, the market recovery may have you back on track or even ahead of where you need to be in reaching your goals. Review your financial plan and your progress toward your goals. For example, if you find yourself farther along than your plan calls for, perhaps it is time to reassess your investment allocation and lower your investment risk profile.
3. Take this opportunity to upgrade your portfolio. A rising market can make even sub-par funds or stocks look good. Take the rebalancing process a step further and use the market rally as a reason to review your portfolio and develop a strategy to weed out some of the “dogs.” Investments held in tax-deferred accounts such as an IRA will have no tax implications. For your taxable accounts, you might be able to offset any gains that might result by selling holdings with losses. Even if the result of upgrading your portfolio is a net taxable gain, remember that capital gains rates remain at historic lows via the recent extension of Bush tax cuts.
The stock market downturn of 2008-09 was swift, drastic, and painful. A powerful stock market rally may ease some of this pain, but it would be a shame to not to learn from the pain of the downturn. Your investments and your financial plan require review and maintenance on a regular basis. Make adjustments as needed. Don’t get complacent.
Feel free to contact me if you need help with this process.
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