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Reducing the Risks in Flying Close to the Sun

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By keeping some of your money in cash or cash equivalents (such as money market funds), you can reduce risk, stay flexible, and have more money to put into the market after a drop.

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For many investors, the current go-go stock market is a cause for joy. But for others, it’s an ironic source of anxiety.

As of mid-December, the Dow Jones Industrial Average hit 84 new market highs since November of 2016. And the markets have continued to set new highs as we march toward the end of the year.

While many investors welcome these highs, more wary investors — physicians among them – fear a sudden, steep decline. Still haunted by the specter of the devastating drop of 2008, they have reservations about investing.

Many analysts aren’t discounting a correction (defined as a sudden decline of 10%) or at least a lesser drop, a pullback. On average, in recent years there has been a correction about every 18 months, and the last correction in the S&P 500 ended in February 2016. And there have since been 2 shallow pullbacks: 1 of about 5% before last November's election and another of about 6% associated with Brexit vote in June 2016.

An overdue correction doesn’t daunt many investors feeding the ascending DOW, but the skittish among us may focus on some analysts’ comparisons of this market with Icarus — the figure in Greek mythology who met his demise by flying so high that his wax-covered wings were melted by the sun. Any market that flies this high, goes the logic, is perilous, though these analysts do back up this classical analogy up with historical market analysis and statistics.

Regardless of your view of what the market will do, there are some perspectives and measures you might want to consider:

  • Your time horizon. When are you going to need money from your investments? If it’s for your retirement and you’re 60 years old and planning to retire in several years, and plan substantial liquidations right after you stop working, you should probably be more proactive in reducing stock holdings, and invest more in less risky assets.
  • Your goals. It’s all about having the right type of assets to meet specific goals on your personal schedule. Let’s say you plan to buy a retirement home in your mid-50s and move into it after you retire in your 60s. Those who can afford it — including most physicians — typically like to buy this home well before retirement so they can use it as a summer home. A good way to approach these different goals within set time horizons is to keep assets for them in separate investment buckets. If you’re planning to buy your retirement home in 5 years, you’ll want less stocks and more short-term bonds in this bucket, and perhaps some alternative investments (any investment other than stocks or bonds, including real estate investment trusts and commodities, both of which are accessible through exchange-traded funds). This way, your retirement-home bucket won’t be as vulnerable to a sudden stock market drop that could occur when you plan to liquidate to buy the property.
  • The potential rewards of gearing some of your portfolio to sector rotation. Different market sectors tend to do well at different phases of the economic cycle —from bust to boom and back again. Economists define these phases of the economy’s inevitable ebb and flow as early cycle, mid cycle, late cycle and recession. For entirely logical reasons, some sectors do better than others in different business and economic cycles. So the idea is to note where your money is currently allocated and rebalance some assets to the appropriate sector — preferably, on the cusp of a cycle change or other emerging factors, like a corporate tax cut.

Sectors that tend to do well during the later stages of a business cycle include materials healthcare and energy. The new tax law, which passed Congress in late December, may benefit some sectors more than others, so you may want to consider these firms accordingly. Those benefitting might include large tech companies with substantial piles of cash parked overseas, banks, airlines, railroads and energy firms. In addition, small-company stocks that currently tend to pay higher-than-average tax rates could also do well.

  • Keep some of your powder dry. By keeping some of your money in cash or cash equivalents (such as money market funds), you can reduce risk, stay flexible, and have more money to put into the market after a drop. The more nervous you are about the current ethereal market, the more of your portfolio you might want to keep in cash. To that extent, if the market goes down, you’ll be happy. (And if it goes up, you’ll still be happy.) With historically low inflation these days, you won’t suffer much erosion of buying power in the short term.

By managing your stock market risk these moves, you can help protect your portfolio—whether you’re a stalwart bull or a Chicken Little.

Eric C. Jansen, a Chartered Financial Consultant, is the founder, president and chief investment officer of Westborough, Mass.-based AspenCross Wealth Management, which provides fee-only retirement-income planning and investment management services for high-net- worth clients nationwide.

Registered Representative/Securities and Investment Advisory Services offered through Signator Investors, Inc. Member FINRA, SIPC, and Registered Investment Advisor. AspenCross Wealth Management is independent of Signator.

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