investing

Now That Stock Prices Have Rebounded, How Do I Protect My Gains?

That big, scary downturn at the end of 2018 may be in the rearview mirror, but that doesn't mean you can just forget it. Here are six steps investors can take to be ready for the next time.

Now that the U.S. stock market has recaptured most of its losses from 2018’s fourth quarter, many investors are breathing a sigh of relief. From its lows on Dec. 24, the Standard & Poor’s 500 Index, jumped 18% through the end of February. The index is now within striking distance of a record high.

It’s stunning how the consensus outlook has changed in just a couple of months. When the stock market was taking a nosedive late last year, some economists were predicting a dreary 2019, if not a downright recession. Many market participants were worried about the Federal Reserve’s intention to continuing hiking rates, new China tariffs were on the horizon, and the outlook for 2019 earnings was turning bleak.

Now that the Fed has softened its stance on near-term rate hikes and our leaders appear optimistic about the outcome of U.S.-China trade talks, some of those concerns feel like a distant memory. While U.S. economic growth is expected to slow this year, most experts still expect it to outpace the majority of other regions in the world.

Investors Can’t Afford to Get Complacent

The recent rebound is certainly good news; but it may also may be a wake-up call for many investors. If December’s sinking stock market caused some sleepless nights, now may be a good time to evaluate your tolerance for a possible bumpy ride in the future.

Eventually, the economy will falter and enter a recession, which will likely send stock prices lower. When that happens, it will be too late to begin selling stocks that will drag down your overall portfolio.

Here's What to Consider Doing Now

To protect the gains we’ve experienced so far in 2019, now is a good time to assess your investment strategy and make any needed adjustments. Here are six recommendations to consider in achieving that goal:

  • Rebalance your investment portfolio to reflect the right mix of stocks and bonds. For example, if your overall goal is to invest 60% of your portfolio in stocks and 40% in bonds, the rise in equities has likely tilted it too heavily toward stocks. If that’s the case, any downturn in stocks will have a bigger impact than you’d planned for. Instead of getting greedy, stay disciplined and trim the percentage in stocks to get back to your target.
  • Maintain a diversified portfolio. The values of many stocks are quite high. These stocks are expensive, so avoid the temptation to jump in and inve.st in stocks that are wildly popular; at some point, even the fastest-growing companies experience a slowdown in revenue and earnings growth. When that happens, you can scoop them up when they are on sale.
  • Establish a range for the percentage of your portfolio that consists of stock, and consider moving toward the lower end of that range. For example, if you are comfortable with 50% to 70% of your portfolio in stocks, today’s high valuations would suggest moving toward the bottom of that range.
  • Consider investigating companies or markets that have lower valuations than the broad large markets, such as the Standard & Poor’s 500, which is at times dominated by a relatively few big companies. Also, many foreign markets have not risen as much as the U.S. markets, and therefore some are more attractively priced.
  • Think about bumping up your cash position. If you are retired and are making regular withdrawals from your investments, consider keeping enough money in cash and short-term bonds to cover your expenses for two to three years. This strategy can offer protection when there is a downturn in stock prices. You will not be forced to sell investments at a lower price to provide income, giving you more security to ride out any storm.
  • Take a look at your debt picture. If you have excessive debt, use gains from the run-up in stock prices to pay down some or all of it. Paying off a large amount of debt will improve your personal balance sheet and save money by reducing interest payments.

The Bottom Line for Investors

All of us want the peace of mind that comes with a sound, long-term investment plan. When times get tough, we don’t want to be scrambling to react to the latest piece of bad news in the stock market. To avoid that scenario, take time now to review your plan and make sure it’s the one that makes sense whether the economy is good, bad or ugly.

About the Author

Mike DeWitt, CFA

Partner and Wealth Adviser, Brightworth

Mike DeWitt is a Partner and Wealth Adviser at Brightworth, a fee-only wealth management firm with offices in Atlanta and Charlotte, N.C. He works with high net worth families in the areas of investment management, retirement transition and estate planning. With over 20 years of portfolio management experience, Mike is a Chartered Financial Analyst® (CFA) Charterholder and serves on Brightworth's Investment Committee. He received his Bachelor of Science in Finance from Auburn University.

Most Popular

Dying Careers You May Want to Steer Clear Of
careers

Dying Careers You May Want to Steer Clear Of

It’s tough to change, but your job could depend on it. Be flexible in your career goals – and talk with your kids about their own aspirations, because…
September 13, 2021
5 Top Dividend Aristocrats to Beef Up Your Portfolio
dividend stocks

5 Top Dividend Aristocrats to Beef Up Your Portfolio

The 65-member Dividend Aristocrats are among the market's best sources of reliable, predictable income. But these five stand out as truly elite.
September 14, 2021
7 Best Commodity Stocks to Play the Coming Boom
commodities

7 Best Commodity Stocks to Play the Coming Boom

These seven commodity stocks are poised to take advantage of a unique confluence of events. Just mind the volatility.
September 8, 2021

Recommended

7 Bond Funds to Anchor Your Retirement Portfolio
bonds

7 Bond Funds to Anchor Your Retirement Portfolio

Retirement savers need to weigh interest-rate and inflation risks when structuring their investments. These seven bond funds help them do just that.
September 28, 2021
The Forces Shaping Retirement in the 2020s
Coronavirus and Your Money

The Forces Shaping Retirement in the 2020s

Gone are the days of retiring with a pension and gold watch. What retirement means has changed significantly and not always for the better.
September 28, 2021
Hidden Fees, Unintentional Wealth Transfers and Other Lurking Retirement Hazards
Making Your Money Last

Hidden Fees, Unintentional Wealth Transfers and Other Lurking Retirement Hazards

A secure retirement is a happy retirement. Here are three things you can do to improve your odds that your golden years will be bountiful and worry-fr…
September 28, 2021
Tax Changes and Key Amounts for the 2021 Tax Year
tax law

Tax Changes and Key Amounts for the 2021 Tax Year

Americans are facing a long list of tax changes for the 2021 tax year. Smart taxpayers will start planning for them now.
September 23, 2021