“Be fearful when others are greedy and to be greedy only when others are fearful.”
Warren Buffet
Asset prices are hitting all time highs which is driving excitement across social media and the virtual water cooler. While I continue to live and breath dollar cost averaging, now is a great time to review your personal finances and your portfolio to make sure you’re unbreakable….in all market conditions. Here are the top 3 things I’m doing in my own personal finances with the markets hitting all time highs.
1. Rebalance my cash position. Contrary to most social media posts I’ve seen, it’s a great time to be in cash. Specifically, make sure your emergency fund is full and your cash position (often looked at as total cash divided by total assets is where you want it. I personally like to keep a 10% cash position at all times so when investments increase it naturally requires me to set aside more cash. Conversely when the market declines, my cash position is too high and it requires me to invest more. Generally, my approach is not to sell an asset that I still like, but rather I don’t reinvest dividends that I am earning. It’s a more tax efficient approach and also keeps me invested.
2. Confirm I still like my investments. What you liked at one price you may not like at it’s new price. It’s always a good idea to review your investments to confirm the current price and your portfolio diversification is still attractive to you. For example, I bought Nividia stock when it was trading at ~40x Price / Earnings ratio and now it’s trading at 70x trailing twelve months PE. It also makes up a much larger portion of my portfolio than it did when I first purchased it. Both of those are reasons enough to reconfirm that my investment thesis still makes sense.
Admittedly, it’s pretty rare that I sell a stock even when it’s gone up quite a bit, but I have trimmed positions in order to build my cash position or further diversify my overall portfolio.
3. Look at investments where no one else is looking. Another contrarian play here is to look at investments that aren’t getting the attention, but are still fundamentally solid. All of the hype is around the Magnificent 7 stocks and for good reason, but there are plenty of other assets out there (stocks, bonds, ETFs, real estate etc.) that have better fundamentals for long-term growth. My advice here is to be careful chasing stocks – sometimes you’ll hit a homerun, but often these high flyers return back to earth. There was an article in The Wall Street Journal recently that highlighted that when a group of stocks get a name (e.g. Magnificent 7), they typically have about a year of market overperformance before they start giving back their big returns.
