Within twenty-five miles of where I sit are two casinos. This is Pittsburgh not Las Vegas. Anyone who is a legitimate high roller is more likely to hop a plane to Nevada rather than ramble off in the Chevy Impala to the local Western Pa slots parlor. For the most part these casinos are alternative entertainment to the cineplex or Steeler's game. A group of girlfriends head down to the casino for a night of possibility or a few couples meet with understanding that the winner pays for dinner. One's financial future is not at stake.
If one views the stock market like a casino, but the ultimate outcome determines personal future well being now is a good time to align risk with needed outcome. The financial press is rife with pronouncements that the ten percent correction is behind us, excesses have been relieved and we can look ahead to risk free blue skies ahead. It is too early to assess the outcome of last weeks plunge and subsequent rebound but internal market indications are that risk tolerance is declining. While valuation is the arbiter of long term returns, risk tolerance is the short term driver of market direction. It appears that the market as a whole is eyeing the exits, just in case.
Current valuation of the market is still double historical norms. The corollary of high valuation is low return. Projecting ten year returns from current valuation still produces a calculated zero return. In other words, "do you feel lucky?" As the market has gone from over valued to extremely overvalued to wow!, this is a good time to review portfolios. Speculative holdings should be assessed for fundamental strength and market sensitivity.
Stocks with low beta should be considered as replacements for high beta speculative holdings. The saying, "no one ever went broke taking a profit", may be worth considering now. Biotech stocks have had a spectacular run in recent years and while the future looks bright in the industry many analysts agree valuations are ahead of current realities. Other market favorites such as Google, Apple and Disney have had spectacular runs and are apt to react strongly to news the market perceives as negative. Such household names remain excellent long term holdings but should be assessed in line with an individual's timing for withdrawals and risk tolerance. If one particular success has taken on a larger than prudent portion of a portfolio it is worth considering judicious pruning.
The market has been enamored with companies with steady histories of dividend payment. The ability to pay and growth dividends can go a long way toward ameliorating stock volatility. The concept of "getting paid to wait," is worth considering. If dividends are important to an investor, the market gyrations of a company like Exxon, Johnson and Johnson, Pepsi or Coca-Cola can be weathered adequately while waiting for broad market valuations to provide a better time to add to such holdings.
If a portfolio is your casino keep your fingers crossed. If it's your retirement it's worth being good and not just lucky.
