There are a number of stories in the consumer press in recent weeks taking one side or another of this “debate.” Some argue that the so-called “Armageddon” scenario is no longer a realistic probability – and therefore it is now “safe” to pile back into equities – while others say the 50%+ rally from the March lows has come too far too fast. The answer for you and your situation may depend on what you have been doing the last several months.
If you panicked in late 2008 or early 2009 and are now fully in cash, a realistic determination of whether your long-term financial goals can be met without taking some risk – whether to increase your future purchasing power or just to keep up with inflation – is the place to start. If not, it may be time to begin Dollar Cost Averaging back into the market only after you determine an appropriate allocation mix that includes stocks. While we view the equity market as slightly overvalued at this point in time, there is no guarantee that it won’t remain so for many more months or years. In the long run, stock prices will correlate with corporate earnings. As such, stock prices need not fall from current levels to become fairly valued (or even undervalued) if corporate profits increase faster than stock prices from this point forward.
If you remained fully invested throughout the market turmoil of the past couple of years, whether or not it is time for you to rebalance your portfolio is likely a function of how long it has been since you last made appropriate adjustments. If you rebalanced back to an appropriate target allocation early this year, it is probably prudent to readjust your portfolio following the summer’s significant run higher. If adjustments were last made very recently or when markets were trading at similar levels (about 12-13 months ago), necessary adjustments may be less than the prior scenario, but an evaluation of your current allocation mix relative to your target is still likely prudent.
Importantly, any adjustments should be made in the larger context of your goals. While the allocation mix for long-term goals should incorporate expected short-term fluctuations, as the time passes and long-term goals become short-term goals the allocation may need to change to increase the likelihood of success. Generally, the market’s not the place to invest funds for short term goals.
Whether or not “It’s Time to Get Back in the Market” or “Time to Rebalance” depends not on the “state of the market” but on your goals, your risk tolerance and your timeframe.