With the stock market at or near record highs what do you do? I suggest you think like a farmer.
It was just a few years back in 2007 – 2008, when we were all lamenting how much the stock market had fallen. The Dow Jones Industrial Average was cut in half and many feared it would continue to drop. However, after a 7,800-point gain in the DJIA, I hope we have not forgotten the lessons the 18 months of plummeting stock markets numbers taught us. It is time to think like a farmer and rebalance our portfolio.
When I was starting out my mentor in Fee-Only Financial Planning taught me the analogy of the farmer. He said you have to think of equities (stocks, stock mutual funds) as your crops and fixed income investments (bonds, CDs) as your pantry.
Equities = Crops
Fixed Income = Pantry
He went on to state, with crops you plant them in hopes they will grow and be bountiful. When they have grown there comes a time you will need to harvest your crop. When harvesting your crop you will move the goods into storage for safekeeping. You keep your harvest in storage because you know it will be there when you need it. If you leave the crop in the field too long a storm could come by and wipe out all your hard work very quickly.
With your portfolio, you want to behave much like a farmer. With the stock market at record highs, it is time to see if your portfolio is in balance with your investment policy statement (Overarching asset allocation for all your investments). With the recent run up in the stock market, the equity portion of your investment portfolio might be over weighted. If this is the case now is a good time to trim some of those gains and place them into fixed income. In other words, it may be time to harvest the crops.
The idea of harvesting some of your gains while the market is going up is counterintuitive for some. If you review your portfolio and it is out of balance, now is the time to make adjustments. If you adhere to your investment policy, you will still have equities in the market to continue to take advantage of any upside in the market and at the same time, you have put into safe keeping those hard fought gains over the last four years.
Are you ready to think like a farmer?
###
Author
Isaac is a Fee-Only (no products sold) Certified Financial Planner® Practitioner. Isaac founded Stalwart Financial Planning with offices in Fayetteville NC and Durham NC. Isaac provides comprehensive planning and investment management services to individuals from all walks of life. Isaac can be reached by phone at 910-867-8464, or by email (iallen@StalwartPlanning.com). Visit him at Stawart Financial Planning www.StalwartPlanning.com.