4 items for every investor's checklist

Remember to keep a balanced mindset that takes into account the potential for further gains or a possible pullback.

By Minyanville.com Oct 23, 2013 3:23PM
Image: Woman reading newspaper in livingroom © Tetra images/Getty ImagesWith the debt ceiling showdown over, the federal government back to work, and the market at new highs, it is easy to get complacent with your portfolio. 

Many go-go stocks like Tesla Motors (TSLA) and Netflix (NFLX) continue to hit new stratospheric heights while notching triple-digit year-to-date returns. It's easy to get caught up in the euphoria of success as well as the greed that accompanies a good run. 

Having just returned from Las Vegas, I can relate to the feeling of wanting to press your bets when the going is good. However, being nimble and having an exit strategy can be just as important when it’s time to pull some chips off the table in anticipation of those dice coming up seven. The last thing you want to do is see those hard-fought gains evaporate in a swift decline that can accompany this current stage of investor optimism.

The SPDR S&P 500 ETF (SPY) has gained over 24% this year as domestic stocks have climbed a wall of worry that has incorporated everything from political turmoil to global conflict. This resilience has been one of the key reasons I have been advising to put money to work on pullbacks as long as the market remains above its long-term 200-day moving average.   However, with the market sitting near its all-time highs, the risk seems to be more to the downside than upside right now. 

According to recent data, we are continuing to see bullish investor sentiment and outstanding margin debt trend higher. In addition, the iPath S&P 500 VIX Short Term Futures ETN (VXX) has recently fallen to new lows, indicating an overall lack of fear in the marketplace. There are a host of other technical and fundamental reasons why the market is overbought, but the overriding conviction seems to be that either the Fed or Congress will bail us out of the next crisis to come our way. This has led to a level of complacency that I feel is a risk to new capital being put to work at these levels. 

The market can certainly churn higher, and most pundits have settled on an S&P 500 Index (INX) target of 1,800 in the near future. I suspect that number is based largely on its round shape rather than any true valuation metrics. Whether we get there or not, here are a few items that should be on every investors checklist right now:  
  1. The trend is your friend.  I would continue to hold positions in stocks and bonds that are performing well. There is no sense in trying to pick a market top at a random point. In my experience, it is better to stick with the trend and have an exit strategy in place for when the tide starts to turn. I would not be adding significant new exposure to stocks at these levels given their most recent leap higher. Wait for a pullback to add new holdings.
  2. Have a risk management plan in place.  This is one of the foremost tenets that I preach for every investor regardless of your time horizon, risk profile, or otherwise.  You must have a sell discipline or stop loss on every position in your portfolio regardless of your conviction to lock in gains or protect you from a catastrophic loss.  Remember that the market goes down twice as fast as it goes up.
  3. Cash is a valid position.  If your “diversified” portfolio strategy is fully encompassed by three or four technology stocks, then you may want to look at lightening up your exposure.  Selling into strength and having some dry powder on hand will allow you to take advantage of new opportunities at more attractive valuations.  Cash can be a very useful tool and I always have a watch list of positions that I am evaluating for inclusion in my portfolio on a pullback in price.
  4. Look for undervalued income opportunities. The areas of the market that I have been taking advantage of since interest rates peaked in September are undervalued equity-income sectors. Two ETFs that are starting to pick up some momentum and are still well off their 2013 highs are the iShares US Preferred Stock ETF (PFF) and the iShares US Real Estate ETF (IYR). Both funds offer an excellent way to diversify your income portfolio with capital appreciation potential if interest rates continue their descent. In addition, we have been adding several closed-end funds to our portfolios that are trading at discounts and offer unique high yield dividend opportunities. 
No matter how you play the next move in the market, remember to keep a balanced mindset that takes into account the potential for further gains or a possible pullback.  Being nimble and taking advantage of new opportunities will allow you to successfully weather anything the market throws your way. 

More from Minyanville

Oct 23, 2013 5:05PM

""The trend is your friend.  I would continue to hold positions in stocks and bonds that are performing well. There is no sense in trying to pick a market top at a random point.""



years back it was said to never buy a stock without identifying a SELLING price for the planned exit. 


the concept is that you buy with an intent to sell.  therefore you GET OUT at a predetermined point.  be it a small gain or planned large gain. 


a stock is MEANT to be bought low, sell high.  so then sell that your planned gain and be satisfied that you met your goal. 


if the stock goes higher - do more research to understand why and how it went higher.  likewise if it never reaches your planned gain and drops before you get to sell. 


exiting a stock at a 10% gain is a decent gain.  hanging on "just in case" it goes higher will surly see the next serious drop as well. 

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