When shares reach record high, it becomes hard not to join the bandwagon or be victims of FOMO- fear of missing out. This feeling is especially characteristic during the periods of market growth when you would like to invest consciously, believing that the high prices correspond to the reality. If you are already invested, then perhaps it is wise to both cash out and wait for the correction to happen.
In order to properly analyse techniques of how to operate during market highs, it is necessary to know what exactly market highs are.
Portfolio Re-balancing during Market peaks
Portfolio re-ranking is one of the important tactics for using the emerging new high stocks. It is suggested to begin with the checking of your equity position as to the possibility of its growth. A higher proportion of equities within your portfolio is likely to result in higher risks and fluctuating volatility.
The re-balancing process therefore entail cancelling on the equity side, and increasing on the debt side to achieve the right proportion. It assists to bring your portfolio’s balance back to your financial objectives and also enables one to exit congested securities while getting into niches with healthy value.
For instance if your portfolio was set to 60/40, equities/debt, a favorable market will shift this in favor of equities by giving us a percentage of 71/29. This excess of equities raises the risk of your portfolio. To re-balance, you would have to liquidate some equities and over a period purchase debt instrument to get back to the original 60/40 split.
If selling equities is not possible and you have additional cash, then add more to the debt side to fund the required target. Re-balancing helps you to keep the desired portfolio structure and avoid high risks during growing values.
Benefits of Re-balancing Your Portfolio
Incorporation of the rebalancing technique may sound illogical because it requires an investor to sell his/her performing securities in order to purchase other securities that performed poorly. However, this strategy can be very successful. In rebalancing, what you are actually doing is selling what has become overpriced in the market while simultaneously buying those that have been underestimated.
This disciplined approach is to invest systematically like in the systematic investment plans or SIPs. In this respect, when it comes to SIPs, you automatically buy more units of a particular mutual fund when their price is relatively low, and fewer units of the same mutual fund when they cost high. It draws the cost of your stocks and aligns you to a baseline ledger whereby your major profits are earned in the long run.
It assists you to reduce on risks, to position your-self in a good position and to take advantages of the fluctuating market and it gives you an opportunity to have your investments in the right position as per your financial plan.
Essential Investing Tips
Set Long-Term Goals: Focus on time horizon, one should make his/her investment decision not based on trends in the short-term market but with regard to long term goals. Do not be tempted to start selling on the basis of market high especially when the peaks have been experienced.
Avoid Market Timing: It is very unwise and also often misleading to attempt to determine when to buy or when to sell in the market. Rather, one needs to be disciplined and keep making regular investments while letting the invested amounts grow in the long term.
Focus on Asset Allocation: Plan and manage your portfolio often so that it meets the required diversification. Through re-balancing, risks are controlled and the investment portfolio is brought back to the investor’s acceptable risk/return ratio as defined by his/ her investment objectives.
From this, you can be able to be on track for making right decision on your investments that will help you in future.
Conclusion
It is advised to re-balance when stocks are soaring high, this is advice that is given by financial experts. This includes exchanging overpriced stocks for undervalued ones, though other assets can also be qualified for such a change. Therefore, proper reinvention of the assets can assist in averting risk while keeping the portfolio on track with your goals.
Even though it can at many times be enticing to sell your equities at what seems to be peaks then use short term performance to make your decisions, then it is unwise to do so. Nevertheless, it is appropriate to stay long-term oriented towards your investment plan. It should be remembered that the law of supply and demand does not mean that one has to sell off due to high market prices recorded. To attain the best outcomes, then it is recommended that you sustain a long-term strategic plan.