When is the best time to plan a share sale? When the indices naturally reach new highs.
In rare cases, investors consider defensive movements in their 401 (k) when stocks go up, but at this point you should consider diversifying your investments.
When stocks get restless, I remember a comment from my old colleague Noel, who always said, “Well, it’s either the warning bell or the food bell.” Most of the time, as we discussed in the previous columns, it is the bell for dinner.
Since I started investing in 1987 through last year, equities, measured by the industrial average of Dow Jones, have had positive returns in 27 of 33 years, or 82% of the year, over that period. This route includes Black Monday 1987, when I started my career, the 2000-2002 market slide, and the Bear Market 2008 through March 2009.
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All of this proves that stock sales are usually a unique opportunity to put more holdings on your plate at lower prices. The cumulative total return from January 1, 1987 to the end of last year was 3,415%.
An event like Black Monday, my friends, was an epic bell.
Buy cheap, sell expensive with your 401 (k)
If, like me, you think stocks are still in a long-term bull market, significant downturns (see Q4 2018) provide a happy opportunity to look at our 401 (k) contributions and allocations with new eyes. The hardest part is being a buyer of stocks in a falling market and a seller in a rising. It just feels wrong. But it works.
When stocks experience their inevitable decline (markets see a 5% to 10% correction almost every year), raise your contribution level to 401 (k). It just makes sense to buy more of something when it is cheaper. You can call your contribution back as soon as the market recovers if you have to, but you’ve used the weakness to increase your purchasing power. This will make a strong contribution to the total over a lifetime of 401 (k).
Add a fund that invests in dividend stocks with proceeds from your emerging growth fund. The main consideration is a fund that invests in companies that increase their dividend each year. No longer connected only to utilities and industries that are growing as the economy grows – dividends are now being paid by technology companies like Microsoft and Apple as well as Starbucks and McDonalds, which have long been classified as growth stocks. The advantage of investing in these stocks is that companies tend to increase dividends faster than traditional dividend payers. A second benefit is the ability to put together growing dividends to increase total return and provide natural protection in declining markets.
Realign your assignments
Don’t forget the rest of the world. The United States is often the best house in the global block. However, global markets can offer additional diversification and total return. This may be a good place to invest when US stocks hit historic highs.
You should also rebalance stocks that are well above the originally selected target. The outperformance is good. However, you don’t want the market to make your asset allocation decisions for you. If you have decided to invest 50% of your 401 (k) in a particular fund, let it go. However, if it is more than 10% -15% above your original allocation, cut it back and transfer the money to a fund that offers new diversification or may have stayed behind recently. Here too you increase your purchasing power.
It is true that an investment in good and bad years brings a convincing total return. Never succumb to the siren song that convinces us when stocks rise that they will continue to do so. You should also not give in to the temptation to sell out when stocks are down. Selling stocks at the end of the painful bear market in 2008 would have cost you the opportunity to enjoy the 333% that stocks returned from January 1, 2009 to last year (again measured by the DJIA).