The FTSE 100 is hovering near all-time highs and such milestones naturally inspire introspection among investors. For one, it highlights that valuations are perhaps fuller than they have been in recent years and gives the impression that markets could be a little overpriced.
With that in mind, what changes, if any, should we make to our investing strategy as the index enters uncharted territory?
In my opinion, now is the perfect time to get back to basics, including safeguarding your life outside of the markets. Now could be the perfect time to build up that emergency fund you’ve always known you should have, just in case life throws up any unexpected costs.
In the unlikely event of a market crash, or a far more likely correction, you don’t want to be a forced seller just because you got greedy while the going was good.
In fact, I’d be tempted to go a little further and build up some dry powder in the brokerage account too – I’m thinking 15%-20%. That might sound overly bearish, but research shows that markets pull back on a surprisingly regular basis before eventually climbing to new highs. Having a little cash on the side might be the difference between snapping up that share that always seemed a little too expensive and lamenting the loss of a bargain.
I’d also suggest investors reappraise their current holdings. Given that some valuations are indeed looking generous, now could be the perfect time to rid your portfolio of any positions you don’t have solid beleief in. As Warren Buffett advises: “Unless you can watch your stock holding decline by 50% without becoming panic-stricken, you should not be in the stock market.”
Believe in your purchases
I truly believe the best way to navigate new stock market highs is to stick to a long-term buy-and-hold approach. If you believe a company will be worth far more in 10 years than it is today, you wont feel the need to bank gains when it looks slightly overvalued. It’ll also make dealing with those calamitous 50% collapses easier, which you will experience at some point over your stock picking career if you do it long enough, even though they are thankfully rather rare.
In summary, there’s nothing wrong with taking a little risk off the table in these conditions, especially if the resulting cash reserves facilitate a high-conviction buy once valuations seem more appealing.
If you have a lot of capital to invest, however, there’s no point sitting on the sidelines.
If you’re finding valuations a little nervy, I’d advise the tried-and-tested strategy of pound-cost-averaging into a tracker fund over time by investing a fixed amount at regular intervals (say, once a quarter) regardless of what the market is doing.
If you’re still interested in stock-picking then I suggest you maintain exacting standards from both valuations and business models. Buffett recommends investing as if you only have a limited amount of buys left in your investing career and that’s particularly sound advice in the current market. He says: “I could improve your ultimate financial welfare by giving you a ticket with only 20 slots in it so that you had 20 punches – representing all the investments that you got to make in a lifetime. And once you’d punched through the card, you couldn’t make any more investments at all.”