The stock market is flashing yellow lights. It is dangerous to assume the market will climb forever and investors are once again bullish, a sign that caution may be thrown to the wind. Earnings have kept pace with stock prices until now but will need to hold up for stocks to move much higher. The market may have room to run, but it makes sense to show some discipline. You might pat yourself on the back today only to find you are kicking yourself tomorrow.
Market declines are healthy – like letting air out of balloons. They take the pressure off and let fundamentals catch up with reality. What to do today? Here are a few tips:
• Avoid overhyped stocks. It is easy to get caught up in the frenzy and wish you owned a stock that has doubled.
• Don’t trade without thinking about the long -term advantage to owning or eliminating a position. Stocks that lag or go down in a bull market are frustrating. Throwing in the towel on a stock that hasn’t kept pace is often a sale at the bottom. Sell if the fundamentals are compromised, not because you are tired of worrying about it.
• Trust your instincts and don’t blindly follow Wall Street talking heads. They are often wrong.
• Avoid concentrations. Use discipline and trim stocks that are large positions, even if you are emotionally attached. Holding stock in a company you love is not prudent if the stock price has risen beyond the fundamentals. You own stocks, not companies. Trim your winners so you can add to holdings if the market declines.
• Diversify – build positions in all major sectors of the market.
• Don’t panic and sell everything as the market declines. Market timing doesn’t work and over the long -term stocks provide the best returns while also providing a hedge against inflation.
• Don’t focus on short- term relative performance. Trying to keep up with an index can cause you to lose sight of your long-term goals.
• If in doubt – do nothing.