The market has been on a tear this year—well, the largest companies at least. What the S&P 500 has achieved this year (up about 26% at the time of writing) is an uncommon occurrence. By way of comparison—and lest we forget—as recently as 2022, the S&P 500 was down over 18% for the year. Market volatility, both down and up, has increased in recent years, and it’s hard to see that changing significantly in the near term.
This Weekly Whiteboard focuses on how to position a portfolio after a strong upward market move. With a significant return year nearly “in the books,” it’s natural to feel either cautious or eager about investing, depending on your perspective. With that in mind, here are some guidelines to consider as we approach 2025 (and beyond, really).
Avoid Emotional Decisions
Large market moves can trigger fear of missing out (FOMO) or overconfidence. It’s important to avoid acting impulsively or reactively. Investment decisions should be based on sound analysis—not fear or exuberance.
Reassess Valuations
After significant gains, some stocks or other assets may be overvalued relative to their historical averages or intrinsic value. The challenge lies in discerning which companies, sectors, or asset classes might continue to rise and which now have valuations that seem unreasonable or unsustainable.
Review Investment Goals
Ensure that any new investments or strategic asset allocations align with long-term financial goals, risk tolerance, and time horizon. A short-term market surge doesn’t necessarily warrant changing your broader strategy—nor does a short-term market drop.
Rebalance the Portfolio
A market surge can cause your portfolio to become unbalanced (e.g., equities growing larger than intended). This has been particularly evident in 2024—it’s been hard to avoid. Rebalancing helps lock in gains and maintain your desired risk profile.
Don’t Chase Performance
Past performance does not guarantee future returns. While this line may appear in the fine print of every investment presentation, commercial, and report, that doesn’t diminish its fundamental truth. Staying with investments just because they’ve recently performed well can be a mistake.
Of course, great companies can outperform for long periods. But instead of sticking with investments solely because they’re popular, diversifying into areas that haven’t moved as much and may present untapped opportunities can be valuable.
Assess Market Fundamentals
Evaluating whether the recent upward move was justified by improving fundamentals (e.g., earnings growth, economic strength) or driven by speculation is a core action for investment managers. Additionally, understanding technical market metrics and paying close attention to factors like interest rates, inflation, corporate earnings, and overall economic trends can prove to be important when thinking about a strategic, long-term asset allocation.
Use Dollar-Cost Averaging (DCA)
If you’re hesitant to invest a lump sum after a big rally, consider spreading investments over time through a dollar-cost averaging approach. This can reduce timing risk. The evidence shows that there may not be a substantial impact on return – rather, the value is in staying consistent and invested regardless of what the market is doing from one day or week to the next.
Additionally, maintaining cash or liquid assets provides flexibility if opportunities arise later, such as during a market pullback. Markets are often volatile following sharp upward moves.
Diversify Further
Many well-known, long-term investors use market “run-ups” as opportunities to diversify into other asset classes, geographies, or sectors that may be underrepresented in their portfolios. While it is true that concentrated positions can create wealth, the other side of that is also true – a portfolio concentrated in a small number of holdings can also destroy wealth.
Focus on “Quality”
During market euphoria, investors may take risks on lower-quality assets. While there’s no universal consensus on what constitutes “quality,” sticking with high-quality companies, sectors, and asset classes can provide stability when valuations are elevated. Look for strong balance sheets, reliable earnings and margins, and sustainable competitive advantages.
Prepare for Volatility
Markets rarely move in a straight line. After a big rally, prepare for potential corrections—small or large—and have a strategy to handle pullbacks.
Consider Tax Implications
This is my final point, but I couldn’t leave it off the list—after all, I’m a CPA! If you’re considering selling investments to rebalance or take profits, be mindful of potential capital gains taxes.
Strategies like tax-loss harvesting or holding investments for long-term gains can help. That said, I’d caution that taxes should rarely (though not never) drive investment decision-making.
This week’s message is intended to provide insight into how many investors and investment managers (East Franklin Capital included) are thinking about the markets as we enter 2025. It is paramount that we remain disciplined and focused on a long-term strategy rather than reacting to short-term market moves or the noise of the financial press.
Who knows what the next year will bring? We don’t! But we do know that staying organized, focused, and disciplined are good habits—regardless of what the market has in store.
