Despite momentary downdrafts, the major stock market indexes keep reaching new highs. The good news is that there are few signs of widespread irrational exuberance on Wall Street or Main Street. The unemployment rate is too high for giddiness. My sense is that folks would much rather moan about the Vikings and hope for the Wild than talk about the markets and watch CNBC.
Still, many worry whether the gains will hold. The worry reflects the realization that the Standard & Poor’s 500 index is up 166 percent since hitting bottom in March 2009. But markets, unlike trees, don’t keep going up.
The strong stock market has helped to repair retirement portfolios. For example, in the third quarter of this year Fidelity Investments — the nation’s largest 401(k) provider — found that its average 401(k) balance had risen to a record high of $84,300, up 11.1 percent from a year ago. The comparable number for 2007 was $58,900.
In other words, now is a good time to review your retirement portfolio. Personally, I’m reasonably optimistic about prospects for corporate profits and, therefore, that stock market valuations will hold even as the pace of gains slows.
Yet it’s difficult to shake bubble fears. Many savvy investors are less sanguine. Among them is Ben Inker, co-head of asset allocation at the Boston-based GMO. After analyzing corporate profits and prospective returns, Inker concludes, “The basic point for us remains the same — the U.S. stock market is trading at levels that do not seem capable of supporting the type of returns that investors have gotten used to receiving from equities.”
The reason for taking the time to review your 401(k), IRA and comparable retirement savings plans is precisely because we’re not in the kind of scary market condition that makes it tough to rationally evaluate a portfolio.
Among the questions to explore: Is your portfolio well-diversified, a time-honored protection against catastrophe? Should you rebalance your portfolio? With diversification you’ve divided your portfolio among different assets, say, equities, bonds, cash, international stocks, maybe a real estate investment trust. Over time, the market pushes asset values away from your original allocation. Rebalancing gets you back to your original allocation and allows you to make any adjustments. The rebalancing discipline also allows you to sell high and buy low.
I want to emphasize the importance of your time horizon when evaluating a portfolio. In 1997, William Gross, the investment guru at mutual fund giant Pimco, wrote “Everything You’ve Heard About Investing Is Wrong.’’ He offers a number of investing lessons, including urging investors to focus on a medium-term time frame. “Forget about trading. Set your sights on a horizon and sail until you get there. My ideal location is three to five years because it eliminates the daily flow of emotion,” he writes.
I think that time frame is sensible. For example, for older workers a key question is when will they need to tap retirement savings, not when will they retire. The two dates can differ significantly. The answer has implications for how much of the portfolio goes into safe, less volatile investments.
The bottom line: No one knows where the market going. You can’t get rid of the uncertainty. Instead, take advantage of a strong market to review your strategy for marrying your savings to particular goals.