What To Do at All Time Highs

Back in early 2022, I wrote a post called Bear Market Playbook. It included a list of actionable steps investors can take during market downturns. Today, it feels like we need an opposite list that includes reasonable actions to take when markets are trading at all-time highs.

Before I dive in, you should know that this is not a market prediction. The market’s recent strength does not necessarily require a sell-off to follow.  While it’s normal to see a stock market correction of 10% each calendar year, there’s no guarantee that one is on the horizon. However, I believe it is prudent for investors to maintain a healthy level of short-term pessimism combined with unwavering long-term optimism. This is my near-permanent disposition.

But since we find ourselves at this lovely peak, here are a few things an investor might consider doing.

Replenishing Cash Reserves – Investors already in retirement may want to take this opportunity to sell securities and replenish cash reserves. I am a fan of using large cash reserves to pay for lumpy and unexpected expenses during retirement. Spend down the reserve over time and use a market timing approach to replenish the reserve bucket. Take a chunk from the market and place it in a high-yield savings account. There hasn’t been a better return on cash reserves since the early 2000s. The size of the cash reserve is a personal choice. I generally see a range of 12-36 months of living expenses, depending on an investor’s risk tolerance, comfort level with cash, and the allocation of their long-term portfolio.

Donate Appreciated Stock—If you are charitably inclined, you might consider donating shares of appreciated stock instead of cash to charity. Donating shares that have increased in price significantly (hello Nvidia?) accomplishes two goals. You take a deduction for the market value of the donation (limited to 30% of your AGI*) on your taxes. Plus, you remove the potential realization of capital gains tax if you sell the security. This can be a huge benefit if a stock is up 1,000%! Securities must qualify for long-term capital gains treatment, so you should only donate stocks owned for over a year. If the charity cannot accept securities as donations, you can set up a donor-advised fund (DAF) first. Donate the appreciated shares to your DAF, then donate cash to the charity.

Portfolio Rebalancing – Market highs are a great time for good old-fashioned portfolio rebalancing. What does that mean? If you follow a financial planning process with a target allocation, your portfolio may have drifted from that initial target. Suppose you planned to hold 80% of your portfolio in stocks and 20% in bonds. Today, perhaps that ratio is closer to 90% stocks and 10% bonds. Rebalancing means you sell the extra 10% in stocks and buy bonds. This is the simplest explanation of rebalancing. You might also look at your mix of growth and value stocks, domestic and International stocks, and other sub-asset class weightings. Of course, this implies you had a target allocation in the first place. If you didn’t, there’s never a better time to create a plan than now. Rebalancing is the only method I know for “buying low and selling high” consistently.

Take (Some) Chips off the Table – If you’ve ever considered reducing the overall risk of your portfolio, market tops are a good time to make a downshift. Remember that reducing risk in your portfolio should be a long-term decision, not an attempt to time the market. You’ll also need a solid plan to fund all of your goals, even if your investment returns are lower in the future. Don’t forget that less risk means less expected return. That trade-off can be worth the peace of mind. If you wanted less stock exposure during the COVID crash or the 2022 bear market, now might be a good time to take some chips off the table and rebalance to a new target allocation.

Don’t Stop Buying – For everyone in savings and accumulation mode, don’t take a market top as a sign to stop buying. I wrote this in the Bear Market Playbook, and the same holds at all-time highs. As my colleague Nick Maggiulli outlined so perfectly in his book Just Keep Buying, the best thing accumulators can do in any market environment is to continue buying risk assets. Don’t stop buying simply because the market is at all-time highs. For long-term investors, the best day to buy the stock market is always “today.” Need more evidence? I was reminded of the best case for buying stocks when Professor Jeremy Siegel and Jeremy Schwartz appeared on our TCAF podcast last week. The 6th edition of Stocks for the Long Run argues why stock returns beat inflation over time. Hearing Josh and Michael interview both of the Jeremys is a treat that should not be missed. Go back and listen.

These are five ideas investors can consider implementing at market tops. I am sure there are others I have missed. The bottom line is to enjoy the good times and stick to your plan. Don’t be surprised to see stocks pull back at some point. On average, stocks decline at least 8% each calendar year. Keeping a cool head and calm demeanor will serve you well in all market environments.



* You should consult your CPA or tax advisor before donating appreciated stock to a charity. There are limits to deductions and rules that exceed the level of detail provided in this post.

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