The Market Is Near Record Highs: What Should Investors Do Now?

When the stock market reaches or approaches record highs, it is natural for investors to wonder whether they should keep investing, make changes to their portfolios, or simply wait for a pullback. Those questions can become even more important for people who are approaching retirement or already relying on their investments to support their lifestyle.

The recent market environment provides a timely example. Last week, the S&P 500 reached another record high before giving back some ground on Friday. For the week ending August 14, the S&P 500 gained approximately 0.4%, while the Nasdaq gained about 0.1%. The Dow declined about 0.6%.

A market near record highs can create both opportunity and uncertainty. However, the most important question for investors is not necessarily, “Where will the market go next?” Instead, it is, “Is my financial plan positioned appropriately for a range of possible market outcomes?”

Why Record Highs Can Feel Uncomfortable

Investors often associate high market levels with increased risk. After all, if stocks have already risen significantly, it may seem reasonable to assume that a decline is just around the corner.

But a record high, by itself, does not tell investors what the market will do next.

Markets can continue reaching new highs over time as corporate earnings, productivity, economic growth, and other factors contribute to rising business values. At the same time, markets can experience significant declines even after periods of strong performance.

That uncertainty is why making major investment decisions based solely on where the market stands today can be risky.

For someone decades away from retirement, a market pullback may be uncomfortable but potentially manageable because there is more time to recover. For someone who is retired and withdrawing from investments, however, the consequences of a poorly timed decline can be more significant.

The Benefits of Staying Invested

One of the biggest risks during a strong market is allowing fear of a future downturn to push you completely out of the market.

Selling investments after they have risen can feel like a way to “lock in” gains. The challenge is determining when to get back in. If the market continues rising, an investor sitting on the sidelines may miss additional growth. If the market declines, deciding when to reinvest can be equally difficult.

For long-term investors, remaining invested according to an appropriate asset allocation can provide an opportunity to participate in future market growth while avoiding the pressure of trying to predict every market high and low.

That does not mean investors should ignore risk. It means risk should be managed through a thoughtful financial plan rather than through short-term market predictions.

Consider Whether Your Portfolio Still Fits Your Plan

A strong market can change the makeup of a portfolio.

For example, suppose an investor originally established a portfolio with a particular balance between stocks and bonds. If stocks rise substantially, the portfolio may eventually contain a larger percentage of stocks than originally intended.

That can leave the investor with more risk than planned.

This is where rebalancing can become useful. Rebalancing involves reviewing the portfolio and, when appropriate, adjusting investments back toward the target allocation established as part of the financial plan.

For investors approaching retirement, this conversation can be particularly important. The goal is not necessarily to avoid stocks. Instead, it may be appropriate to make sure the portfolio has an appropriate combination of growth potential, stability, liquidity, and income-producing assets.

Think About When You Will Need the Money

Your investment time horizon should play an important role in how you respond to market conditions.

Someone who is 30 years from retirement may have the flexibility to tolerate temporary market declines because their investments may not be needed for decades.

Someone who expects to begin taking significant withdrawals within the next few years has a different set of considerations.

Retirees should consider how much they need from their portfolios, when they will need it, and how a significant market decline could affect their withdrawal strategy. Maintaining an appropriate amount of relatively stable assets for near-term expenses may help reduce the need to sell stocks during an unfavorable market environment.

The right approach will vary from person to person. A portfolio that makes sense for one retiree may not be appropriate for another.

Don't Let a Strong Market Change Your Long-Term Strategy

Record highs can also create the temptation to chase performance.

Investors may look at the areas of the market that have performed especially well and wonder whether they should increase their exposure. However, buying investments simply because they have recently performed well can introduce concentration risk and may cause a portfolio to drift away from its intended strategy.

Instead of asking, “What is performing best right now?” investors may benefit from asking questions such as:

• Is my portfolio properly diversified?

• Does my current investment mix reflect my risk tolerance?

• Am I taking more risk than I need?

• Do I have sufficient liquidity for upcoming expenses?

• Is my retirement income strategy still appropriate?

• Have my financial goals or circumstances changed?

  
  

These questions are more useful for long-term planning than trying to predict the next market move.

The Short-Term and Long-Term Financial Impact

In the short term, a rising market can increase the value of investment accounts and potentially improve a household's financial position. For someone considering retirement, higher portfolio values may affect retirement projections and the amount of assets available to generate future income.

However, higher account values can also create new planning considerations. Investors may need to review portfolio allocations, tax strategies, charitable giving plans, or future withdrawal strategies.

Over the long term, the greater benefit of participating in the market is the potential for investment growth to help assets keep pace with inflation and support future financial goals. At the same time, investors must recognize that market returns are not guaranteed and that periods of decline are a normal part of investing.

The objective is therefore not to eliminate market risk. It is to make sure the amount of risk being taken is appropriate for the investor's goals and circumstances.

Why Professional Guidance Can Help

Navigating a market near record highs can be difficult because investment decisions rarely exist in isolation.

A decision to change a portfolio could affect retirement income, taxes, estate planning, charitable giving, and the probability of achieving long-term financial goals.

A knowledgeable financial advisor can help put current market conditions into perspective and evaluate whether changes are actually necessary. Rather than attempting to predict what the market will do next, an advisor can help review your financial plan, investment allocation, cash-flow needs, risk tolerance, and long-term objectives.

This can be especially valuable during retirement, when investment decisions become closely connected to the question of how long your assets need to last.

What Should Investors Do Now?

A market near record highs does not automatically mean it is time to sell, nor does it mean investors should ignore risk.

Instead, consider using this environment as an opportunity to review your financial plan.

Start by reviewing your asset allocation. Make sure your current portfolio still reflects your intended level of risk.

Evaluate your cash-flow needs. If you are approaching or living in retirement, determine how much you may need from your portfolio in the near term.

Consider rebalancing. If certain investments have grown to represent a larger portion of your portfolio than intended, rebalancing may help bring your risk level back in line with your plan.

Avoid making decisions based on headlines alone. Markets can rise or fall for many reasons, and short-term movements are difficult to predict consistently.

Focus on your personal financial goals. The appropriate strategy depends on your age, retirement timeline, income needs, tax situation, risk tolerance, and other circumstances.

Most importantly, remember that a record market is not a financial plan. Whether markets are rising, falling, or moving sideways, investors benefit from having a strategy designed around their individual goals rather than the latest headline.

If you have questions about how current market conditions may affect your retirement or investment strategy, consider speaking with a financial professional about your individual circumstances.

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