When share prices scale new highs, your FOMO kicks in. Fear of missing out (FOMO) is common when stock markets boom. You hope that share prices are correct and that you get a chance to invest. If you are already an investor, consider booking profits and holding your cash to buy again after a correction.
Before delving into the strategy to adopt for market highs, you must know the meaning of an all-time high.
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Rebalancing your portfolio is one of the best strategies to follow when the equity market is at an all-time high. Start by checking if equity allocation in your portfolio has increased significantly. A considerable increase of equity in your portfolio’s allocation makes your portfolio riskier and more volatile.
The rebalancing strategy reduces equity and increases debt investments to achieve the desired mix. The goal is to return the portfolio to a level comfortable with your financial objectives. Adopting this disciplined approach lets you sell overvalued equity and invest in the undervalued asset.
Suppose your portfolio has 60% investments in equities and 40% in debt. After a market rally, the asset allocation changes to 71% equity and 29% debt. Now, your portfolio has an 11% excess of equities, and the debt is short by 11%. This scenario makes your portfolio riskier and more volatile, making you uncomfortable regarding risk tolerance. Thus, you must play around with your asset allocation and restore the asset mix to the original ratio - 60% in equity and 40% in debt.
Rebalancing your portfolio involves selling equities when the market is at an all-time high and using that cash to make more investments in debt. Suppose you do not favor selling equities and have surplus money to invest. In that case, you can hold equity investments and increase debt investments until you achieve the 60% to 40% equity-to-debt mix again.
Rebalancing may seem illogical to many because it involves selling components of an asset class that has performed well previously and using the money to increase investments in an asset whose performance is relatively poor. However, the rebalancing approach makes you invest in assets undervalued and square them off when they are relatively overvalued.
Consequently, the rebalancing strategy is a disciplined method of investing, similar to SIP investments. SIPs give you more units of a mutual fund scheme when the market is low and lesser units of the scheme when the market is rising. This approach helps you average the buying price of mutual funds, enabling you to benefit in the long term.
● Set long-term goals: Your investment decisions should rely on long-term expectations and not market movements in the short term. Don’t let market highs tempt you to make impulsive decisions.
● Avoid market timing: Speculating about market highs and lows is challenging. The chances of going wrong are high. Get disciplined to invest consistently and avoid selling to reap benefits from long-term market growth.
● Focus on asset allocation: Evaluate your portfolio regularly to determine how your assets are allocated and rebalance it to lower your risk and achieve the desired mix. Reallocation of investments ensures that your portfolio’s performance is aligned with your risk appetite and financial goals.
Experts advise you to rebalance your portfolio when the stock market is at an all-time high. You must cautiously add the undervalued and square off the overvalued equity. Asset allocation helps offset the prevailing trend, making this a wise investment strategy.
While selling equity investments when the stock market sets a new high is quite alluring, it is a critical mistake traders can make. Your investing decisions must be based on long-term expectations instead of short-term ones. A correction isn't necessarily around the corner if the market has peaked at an all-time high.