When markets hit record-breaking highs—or lows—not only will you hear about it on the news, you'll likely see the effects on your portfolio. Here’s what you should and shouldn’t do with your investments during market highs and lows.
Planning Your Next Investment Move
Some clients are wondering if now is the time to buy stock funds, while others are contemplating selling them. The truth is, when it comes to making decisions for your portfolio, market highs are just numbers. However, we can take advantage of the market buzz to highlight common reasons why investors consider portfolio moves during such times.
Signal to Move Off the Sidelines?
Investors with portfolios sitting in cash might see news of record highs as a signal to jump back in the market. But timing the market simply doesn't work. Rather than guessing when it's the right time to move cash into stocks in one fell swoop, consider a dollar-cost averaging approach.
It works like this: You consistently invest a fixed amount regardless of the current fund price—for example, $100 on the 15th of each month. If the fund's share price is lower that month, you will end up purchasing more shares. If it's higher the next month, the same $100 buys fewer shares. This method lets you make good use of market lows, giving you more shares to take advantage of future price growth. It also helps reduce the temptation to speculate about when to buy.
Often, investors dollar-cost average by automatically investing from their bank accounts. But you can also move assets from one fund to another through automatic exchange. If you've been hesitantly sitting on the sidelines in cash, this option can help you slowly re-enter the market and diversify your portfolio by exchanging your money market funds for a new allocation that fits your investing goals.
Call to Cash Out?
On the flip side, other investors see market records as a reason for caution and are reluctant to stay invested. They're concerned that the market has reached a peak or is artificially high and anticipate an inevitable fall. They might even be tempted to cash out, trading one risk (market volatility) for another (lack of growth potential).
History reminds us that markets go up and down, and corrections are part of that rollercoaster ride. That's why having a plan and a diversified portfolio are so important. Diversification offers a better approach because you spread your investments across asset types, locations and sizes that react differently to market conditions. The idea is to cover your investment bases: gain in one area helps offset a decline in another.
Reassess Your Investment Portfolio to Stick to Your Plan
If potential sudden market moves have you overly anxious, your portfolio could be due for a checkup. Now can be a good time to make sure market fluctuations haven't thrown off your predetermined portfolio weights.
An overweight stock allocation, for example, can increase the value of your portfolio while simultaneously adding more risk than you intended. In this case, it may be time to rebalance, or sell your winning holdings and get your portfolio allocation back to your original plan.
The Bottom Line of the High-Water Mark
While markets hitting a new high might get its share of buzz, it shouldn't be the catalyst for drastic changes to your portfolio. We believe in relying on an overall investment plan that reflects the time you have to invest, and your overall comfort with risk.
Diversification does not assure a profit nor does it protect against loss of principal.
Rebalancing allows you to keep your asset allocation in line with your goals. It does not guarantee investment returns and does not eliminate risk.
Dollar cost averaging does not ensure a profit or protect against a loss in declining markets. This investment strategy involves continuous investment in securities, regardless of fluctuating price levels. An investor should consider his or her financial ability to continue purchases in periods of low or fluctuating price levels.
Investment return and principal value of security investments will fluctuate. The value at the time of redemption may be more or less than the original cost. Past performance is no guarantee of future results.
The opinions expressed are those of American Century Investments (or the portfolio manager) and are no guarantee of the future performance of any American Century Investments' portfolio. This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.