Investors often face a dilemma when stock prices continue to rise and stock market records are broken. Have stock markets gone too far and should I take profits or should I stay put? In this column some do’s and don’ts about how to deal with this situation.
Moving train
A saying among investors is that investing is something for the long term. Although short-term price fluctuations are sometimes anything but pleasant, history shows that stock prices show an upward trend in the long term. To take advantage of this trend, it is crucial to avoid hasty decisions in times of uncertainty.
In this case, leaving the market is comparable to a moving train: once you get off, it is very difficult to get back on. This creates the risk that the ultimate asset destination is never achieved. Unfortunately, sitting quietly is easier said than done for many investors. Fortunately, there are ways to make the journey a little more enjoyable.
Plan the trip in advance
Those who regularly take the train often do not worry much about the journey. Once you have found your spot, you can sit back and relax. Because you can never be 100% sure how the journey will go, but there is a good chance that you will arrive at your destination on time. Here too we see similarities with investing. Investors who have planned the route well in advance do not have to keep looking nervously out the window.
The rebalancer
Investors can control the risk in their portfolio without this having to be at the expense of the ultimate return. An example of this is rebalancing. Rebalancing is in fact nothing more than bringing the portfolio back into line with the original investment allocation (for example between shares and bonds).
After a period in which equities generated strong returns, the percentage weight of equity investments has increased. By restoring the original ratio, you take some profits from the stock portfolio and invest them in less volatile bonds. At the same time, you prevent the risk in your portfolio from increasing unnoticed.
Style factors
Another strategy that you can apply at the same time is investing in so-called style factors. These are certain features that have led to a better risk-reward ratio in the past. Consider, for example, an attractive valuation, lower volatility or a healthy ratio between debt and equity.
For most investors, maintaining a long-term view is a key principle for successful investing. Avoiding hasty decisions, such as exiting the market when prices are rising, is very important. Therefore, make sure you are well prepared before you hop on the investing train and make yourself as comfortable as possible along the way.
Jaap Steur has been working at Axento Asset Management since 2018. As a portfolio manager, he is responsible for the daily management of the customer portfolios of Care IS and Axento Vermogensbeheer.
2024-01-30 14:30:00
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