The stock market is starting to show signs of exhaustion and it may be a good time to rebalance your portfolio and make sure you are comfortable with the amount of risk you are taking in your investment allocation. There are several signs of exhaustion in the market.
Suppose that you’re a middle-aged professional with a 30 year retirement time horizon. Your portfolio is 100% invested in U.S. equities–it consists of 100 shares of the S&P 500, worth $187K at current market prices. Assuming that the fundamentals remain unchanged, which outcome would leave you wealthier at retirement: (1) for the S&P 500 to soar 200% in a glorious bubble-like melt-up, or (2) for the S&P 500 to plunge 66% in a brutal Depression-like crash?
You’ve probably heard the expression, “do not put all your eggs in one basket” and that is the heart of diversification – using multiple means to achieve your goals. In the world of investments, diversification is using multiple investments with different characteristics to achieve long-term positive results.