December 27, 2014

Time to Rebalance Your Portfolio!

In light of the raging 5 year bull market, stock prices are at all time highs with the Dow Jones Industrial Average (the Dow)  hitting 18,000 on December 23. Now is a great time to rebalance your portfolio by selling high priced stocks (Sell High!) and buying an asset category that has done poorly (Buy Low!) OR shifting to a more conservative asset allocation if you are nearing retirement or other financial goal. As a result of the global financial crisis of 2007-09, the Dow hit rock bottom (6,547) on March 9, 2009 (losing 53% from fall 2007 to March 2009) but has gained 175% since then. According to The Wall Street Journal, the broader S&P 500 tripled in that time span. The past 5 years have been one of the best ever for the stock market. I'm not making a forecast nor am I advocating market timing but I am suggesting that if your asset allocation is a bit too heavy on stocks, now is the time to act to lock in some gains. There is no pattern to stock returns but history suggests that when stocks are over-valued, they are unlikely to continue the current 5 year bull market. According to Spencer Jakab (WSJ 12/26/14, "A white-knuckle ride for stocks") the Shiller P/E is just over 27 which means stocks are very high priced compared to historical measures. "Yale professor Robert Shiller's cyclically-adjusted price/earnings ratio, which takes 10 years of earnings adjusted for inflation, is the best known" and widely respected measure of relative stock prices. Check out the graph for a visual indication that stocks are over-valued: the average Shiller CAPE is 16.58; the median is 15.95. The current value of 27.43 is way up there! Time to lock in some of those gains.
Need more convincing? Read: When the stock market is near record highs, it's more important than ever to think about risk.
Joe Udo provides additional perspective:  When to dial down your stock market exposure.

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