Don’t Let New Highs Scare You Away From Stocks

As the S&P 500 breaks out into a new high and the Dow Jones Industrial Average making a run at 17,000, fund investors shouldn’t start second guessing their equity exposure.

Some may worry about the next market turn after the equity markets hit new highs, but investors should remember that markets typically rise to new highs over time, writes John Waggoner for CNBC. If you sold at each high, you could miss out on further gains.

For instance, investors who sold off at the last market all-time high on March 28, 2013 would have missed a 25% rally.

Sam Stovall, managing director of U.S. equity strategy at S&P Capital IQ, points out that new highs are a hallmark of a mature bull market.

Year-to-date, the SPDR Dow Jones Industrial Average ETF is up 3.1%, SPDR S&P 500 rose 6.9% and NASDAQ increased 6.3%. On Friday, the S&P 500 and Dow indices both broke new intra-day highs.

According to S&P Capital IQ data, the average bull market spends about 7% of its life at all-time highs, and so far, the current bull market has spent 5% of its time at all-time highs. Over the long-term, bull markets, like those experienced in the 1980s and 1990s, hovered about 12% and 13% of the time at all-time highs.

Looking at company earnings, Stovall calculates that the S&P 500 has reached their estimate for 2014, but he also estimates that the markets still have another 7.5% to go over the next 12 months.

Nevertheless, there are some good reasons to sell or at least trim an equity position. For instance, investors who have reached their target investment goal can dial back equity positions and shift over to income generating options. Additionally, after the recent rally in stocks, you might be overweight equities. Investors can also rebalance their portfolios to put their overall equity and fixed-income allocations back in line.

Investors who are more risk-adverse by nature can also consider letting their cash levels build up instead of investing into the markets. This way an investor can also save up for a rainy day and buy at the end of the next bear market.

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The views expressed here are that of myself or the cited individual or firm and do not constitute a recommendation, solicitation, or offer by myself, D2 Capital Management, LLC or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service. D2, its clients, and its employees may or may not own any of the securities (or their derivatives) mentioned in this article.

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