Checked your 401(k) balance lately? I’ll bet it’s up, if not at a all time high. That’s a good problem to have, right?
So now what do you do?
Do you make some changes, be more aggressive or go to cash?
Let’s take a look at the choices behind each door one by one.
Door #1: Be More Aggressive
When things have gone so well it’s tempting to want to be even more aggressive with your investments. I saw this in 2000-2001 when everyone, even fellow advisor, were questioning the need for bonds and cash. We all know what happened after that. Having a larger percentage of stocks makes your portfolio more aggressive.
A better approach that I’ve mentioned before is to re-evaluate your risk tolerance. Take a risk tolerance questionnaire. If you truly are a more aggressive investor then go for it. Just don’t let emotion cloud your judgement. Because the good times are rolling doesn’t mean they will keep rolling. In my opinion, during a market high, is not the time to become more aggressive. Consider increasing your contributions. That way you don’t take more risk, and potentially overshoot your retirement goal.
Door #2: Go to Cash
Some investors may feel the need for the exact opposite. To become really defensive right now. Let’s face it the market indexes have never been higher. We are long overdo for a correction. I can see how this logic would make sense.This is simply nothing more than market timing. Let’s face it, no one can do it. Not even the so-called experts.
The problem with this approach is that the next move is knowing when to get back in. You could miss a lot of return if the market goes higher, or you miss the timing of jumping back on board the train! If you are more than say 5 years from retirement, this is probably the dumbest door to choose.
Door #3: Make Some Changes
Here at year-end is great time to actually make some changes to your account. No I’m not talking about a total 180 to the portfolio with drastic changes. I’m talking about rebalancing back to your original percentages. When stock perform this well, a portfolio becomes more aggressive than it should. So take your winners and use the dollars that are over to buy the positions that have done poorly. Buy low sell high, right?
Will this market go higher in 2014? Are we poised for big correction? I don’t know, and neither does anyone else. If you are diversified, use dollar cost averaging and rebalance you will be in good shape. Read some of my other articles and become better educated, or subscribe here for my free Friday delivery via email!