It’s been a banner year for investors, with major stock indexes posting double-digit gains not seen since the roaring twenties.
The S&P 500 climbed over 24% in 2023, marking its best annual performance since 2019. The Dow Jones Industrial Average rose a steady 13%, while the tech-heavy Nasdaq composite soared 43% as investors piled into growth stocks.
For investors with $500,000 in an S&P 500 index fund last January, their nest egg likely grew to around $630,000 over the past 12 months, according to data from Morningstar Direct.
“It’s exciting to see such healthy, positive returns,” said Marguerita Cheng, a certified financial planner and CEO of Blue Ocean Global Wealth. “But this is not the time for investors to get complacent or change course.”
As tempting as it may be to cash out on the market’s meteoric rise, financial advisors caution against reactionary moves. Timing the market rarely pays off in the long run.
Don’t Chase Recent Returns
It’s only natural to want to jump on a rally and seek stocks poised to continue climbing. But chasing recent high returns is often a recipe for buying high and selling low.
Often retail investors get excessively bullish after the move has already happened, turning a win into a loss,” said Ivory Johnson, a CFP and founder of Delancey Wealth Management.
Rather than scramble to catch the wave, stick to your long-term investing strategy. The S&P 500 has historically delivered average annual returns around 6% over the past century. Trying to time the market’s ups and downs could sink those returns close to zero, according to Charles Schwab analysis.
Focus on Time in the Market, Not Market Timing
“I advise clients to remember that time in the market is more important than trying to time the market,” said Cheng. “The market will have highs and lows, but historically continues trending upward over long periods.”
Zooming out over decades reveals stocks reliably deliver positive returns, around 11% annualized between 1900 and 2017 after inflation, according to Johns Hopkins University professor Steve Hanke.
Short-term worries over recessions and pullbacks tend to smooth out over long time horizons. Rather than worry about market peaks, stay invested for the long haul.
Rebalance Your Portfolio
Big market swings can throw your asset allocation out of whack. Stocks may now represent an overweight versus bonds and cash in your portfolio.
“It’s quite possible the market rally has created an overweight to equities versus fixed income,” said Cathy Curtis, a CFP and founder of Curtis Financial Planning. “Rebalancing back to your target allocation can lock in gains from the run-up.”
This disciplined rebalancing forces you to sell high and buy low, aligning with the timeless mantra of investing. Trim stock winners and redirect profits into unloved assets like bonds to maintain your preferred risk exposure.
Review Your Risk Tolerance
Market highs present a good opportunity to check in on your risk appetite. Have your goals or time horizon changed? Could you stomach a 20% or 30% market correction?
“Use rallies to re-examine your risk tolerance and investment horizons,” advised Johnson. “Ask yourself if anything major has changed for you.”
Set aside some time to objectively re-evaluate your ability to weather ups and downs. Knowing your risk tolerance helps determine your optimal asset allocation.
Pay Down Debt, Bolster Emergency Savings
While your core portfolio should stay the course, market peaks allow tapping stock gains in your brokerage account for other priorities.
Consider redirecting some profits to pay off high-interest debt like credit cards or personal loans, advised Sophia Bera, a CFP and founder of Gen Y Planning.
Beefing up emergency savings is another prudent move. Financial planners typically recommend keeping 3-6 months of living expenses readily accessible.
For major goals like debt payoff or rainy day funds, it can make sense to take some chips off the table,” said Bera.
With stocks hitting new heights, stick to the basics rather than get caught up chasing returns. Maintain proper diversification, appropriate risk exposure and ample emergency reserves. Keep investing regularly through ups and downs. Avoid reactionary moves like market timing. And use rallies to make sure your allocations and goals still make sense.
Disciplined investors get rewarded for their patience over the long haul. By tuning out short-term noise, 2023’s market highs could be looked back on as just another milestone along a lifetime journey of compounding growth.