My buddy asked me why I always recommend stocks that are near their five-year record highs. After a brief moment for reflection, I told him, “The market is near an all-time record high, everything is at its five year high.”
Maintain strict target allocations for each asset group within your portfolio. In the main portfolio I manage, my goal is to hold 15 percent of assets in cash. While the market has progressed to the new record high, several of my investments have performed very well. Were I to sell any position that has performed well of late, the proceeds must be reinvested to stay in line with my asset target levels. In this instance target allocations will prevent me from leaving the market while it is middle of its rally. My friend may have capital to invest, but is rejecting my suggestions because of their recent performance preventing him from buying at the top or as the stock’s performance really about to take off?
Furthermore, the recent market success leaves me and my friend enthusiastic about investing – I can’t wait to buy something else that will make money, and he’s all over me for the next hot stock! The mandate to maintain a balance of cash equal 15 percent of the portfolio’s assets restricts my exuberance and may prevent me from buying at the market’s peak before a significant decline.
By maintaining the allocation targets I chose strategy over emotion. By avoiding an emotional response I may not be as successful, I might miss a run or leave money on the table before a downturn, but I will be less likely to make a mistake.