Hey, I love a good rally in the stock market, right? Overcoming a historic fall trend and a lot of scary news coming out of Israel, the U.S. stock market has been in free fall since late October, with major stock indexes down about 8% to 12% in the past three weeks alone. Rose. Take a look at the market-leading “Magnificent 7” index of large-cap tech stocks: MSFT, GOOG, AMZN, NVDA, AAPL, META, and TSLA. The past three weeks have been even more exciting.
During the months when the market is up and my family’s investments are profitable, I have this little routine around my house. I leave my monthly statement on the kitchen counter for her for a day or two so she can enjoy the results of my superior investment skills. In the months when the market punishes us, things go straight to the shredder. We expect her November statement to be a drawn-out one, but I’m willing to take the joke.
Of course, the rally is driven by the only issues that investors seem to really care about right now: inflation and interest rates. Several recently reported inflation indicators have been relatively benign, and as a result, yields in the bond market, particularly the US Treasury market, have retreated and are trending lower. This combination of lower inflation and lower interest rates has the potential to solve some of the significant challenges that exist in the U.S. economy, and equity investors want to declare a perfectly clear signal to get back to the business of making money. He seems to be longing for it.
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So, is our economy in good shape? Will inflation subside, will the U.S. be able to avoid recession, and will the Federal Reserve be able to pull off the “soft landing” that everyone was hoping for? Again, I don’t understand. None of the major structural problems in our economy have been resolved, and although lower interest rates will provide some relief, U.S. resilience and optimism are powerful forces in their own right, and the bulls are now is in control, so I’ll stick with it. that. The new question is what to do about it.
If you’re now asking, “Mark, what do you mean by leaving your statement on the counter and putting down the microphone?” I wish it were that easy. If you read this column regularly, you know that I don’t believe investing is a “set it and forget it” thing. Even long-term portfolios need to be managed and maintained from time to time. Remember that while investing can be rewarding in itself, it is also meant to be a tool that can be used to solve real-world financial problems. And investments that are up 20% in three weeks have the potential to solve more problems, as was the case with some of the great 7 stocks. So here are some tips on what you can do about the stock market’s wild rise.
First, rebalance. All portfolios should be rebalanced periodically to take profits from some investments or purchase undervalued asset classes or holdings. In my opinion, the best time to adjust your balance is during rallies and adjustments. Of course, this is easier said than done, and I personally believe that you may have to rob me to extract one of my precious 7 great stocks from my portfolio. I know, but this is exactly what we are being challenged to do and why. It’s very difficult.
If your portfolio is primarily mutual funds based on employer retirement plans such as 401(k)s, this rally happens to correspond well with the end of the year, so log in to your account to enjoy your gains and increase your total stock count. It’s a good idea to check. Market exposure of the account. Then do the math to estimate how much a 20% to 30% down market correction will move your account in dollar terms. If this number is acceptable, leave it alone. If not, this increase is a great opportunity to adjust your risk level to an acceptable level. There’s a good chance your 401(k) provider has a tool on their website to help you with this process, but if not, you can calculate it manually. Assume that all equity funds fully participate in both ups and downs.
The second thing is to pay something back. If your investment portfolio is not a retirement plan and you can sell your investments and withdraw your balance, why not use some of the profits in your account to improve other parts of your balance sheet? Stock Price Being appreciated essentially means that the currency is appreciating, and currency appreciation can be used to achieve other goals. You can improve your life in the real world by paying off your debt, or even your mortgage, with appreciated stocks. Why not do the math and consider your options?
Third, hedge. For more sophisticated investors, rallies are the perfect time to incorporate hedging into your portfolio. Building a hedge is beyond the scope of this column, but with research and advice, you can develop a strategy to protect your profits. Enjoy the rally.
The opinions expressed in this material are for general information only and are not intended to provide specific advice or recommendations to any particular person. Stock investments involve risks such as price fluctuations and loss of principal. No investment strategy can guarantee a profit or protect against loss. Past performance does not guarantee future results. This material may contain forward-looking statements. There is no guarantee that these results will be achieved.
Marc Ruiz is a wealth advisor, partner at Oak Partners, and a registered representative at LPL Financial. Please contact Marc.firstname.lastname@example.org. Securities offered through his LPL Financial, member FINRA/SIPC.