A rally is a beautiful thing, particularly when the correction preceding it was embraced enthusiastically. This is the time to harvest your profits — pipe dreams of great wealth and inflated ego aside — jump on those profits before they erode before your disbelieving eyes. If you over think the environment or over cook the research, you’ll absolutely miss the party.
Unlike many things in life, stock market realities need to be dealt with quickly, decisively, and with zero hindsight — and this market reality? No rally in financial market history has ever escaped the ensuing correction. In the real world of investing, most unrealized profits eventually hit the tax return as realized losses
Here’s a list of ten things to do and to think about right now to protect yourself better than you did the last time a correction blindsided you:
1. Your present asset allocation should have been tuned in to your goals and objectives. Resist the urge to increase your equity allocation because you expect a further rise in stock prices. That would be an attempt to time the market, which is, rather obviously, impossible.
2. Take a look at the past. There has never been a rally that has not succumbed to the next correction, so set reasonable profit-taking targets and pull the trigger.
3. After taking a profit, don’t look back and get yourself agitated. There’s no such thing as a bad profit and no place for hindsight in an investment program.
4. Take a look at the future. Nope, you can’t tell when the correction will come or how long it will last. If you are taking profits during the rally, you will be able to love the correction with equal (almost) enthusiasm.
5. As the rally continues, sell more quickly as opposed to less quickly, and establish new positions slowly and incompletely. Hope for a short and steep decline, but prepare for a longer one.
6. Understand and embrace the “smart cash” concept, an integral part of the investor’s creed.
7. Since your portfolio is at, or very close to, an all-time high-value level, examine your holdings to cull the weakest position now, while it will be least painful. Examine both fundamentals and price, giving significantly more weight to the former. Don’t force the issue.
8. Identify new positions using a consistent set of rules, rally, or correction. That way you will always know which of the two you are dealing with in spite of what the Wall Street propaganda mill spits out.
9. Examine your portfolio’s performance with your asset allocation and investment objectives clearly in focus; in terms of market and interest rate cycles as opposed to calendar quarters and years; and only with the use of the working capital model, because it tunes in to your personal asset allocation.
10. Remember that there is no single index number to use for comparison purposes with a properly designed Market Cycle Investment Management portfolio.
Bonus information with regard to the “income bucket” of your portfolio — every investment portfolio should have at least 30% invested for income, all of the time.
When the stock market gets frothy, bubblicious if you will, you may find some erosion in the market price of your income portfolio positions. Don’t let this concern you too much. It is normal, toward the top of a rally, for investors to become speculators as they move their money from safer investments to overpriced equities.