Market gains signal time for caution

Investors, it’s time to celebrate. The U.S. stock market is at a record high, with the Dow Jones Industrial Average and the Standard & Poor’s 500 indices up more than 10 percent this year. Whether you’re a millennial who recently began investing or a retiree adding to your financial cushion, so far 2017 has been profitable.

There are several reasons to believe the good times could continue a while. Much of the market’s rise has been fueled by corporate profit gains, which are up significantly in the past few years and are expected to continue to grow.

Despite Brexit, North Korea’s development of an advanced intercontinental ballistic missile and other potential geopolitical events, the markets have been mostly calm. And while President Trump has had problems implementing some of his major proposals, the prospects of a federal tax code overhaul or tax cuts could give the market an additional boost.

There are also reasons for caution. By most indications, U.S. stocks are near their peak valuations. As of June 30, companies listed in the S&P 500 sold at about 18 times expected forward earnings, above their 20-year average. Other valuation measures are even higher.

If the economy continues to expand and stocks rise even more, the market may reach a level where prices can’t be justified. If that occurs, a market correction — a drop of 10 percent or more for the overall market — would not be unexpected.

To protect stock gains, now is a good time to assess your investment strategy and make any needed adjustments. Here are six recommendations to consider:

■ Rebalance your portfolio to reflect the right mix of stocks and bonds. For example, if your overall goal is to invest 60 percent of your portfolio in stocks and 40 percent in bonds, the rise in equities has likely tilted it too heavily toward stocks. If that’s the case, any downturn in stocks will have a bigger impact than you’d planned for. Instead of getting greedy, stay disciplined and trim the percentage in stocks to get back to your target.

■ Maintain a diversified portfolio. Many stock values are quite high, particularly those of several technology companies that seem to hit new peaks every day. These stocks are expensive, so avoid the temptation to jump in and invest in stocks that are wildly popular; at some point, even the fastest-growing companies experience a slowdown in revenue and earnings growth. When that happens, you can scoop them up on sale.

■ Many people establish a range for the percentage of their portfolio that consists of stock. If you’re among them, consider moving toward the lower end of the range. For example, if you are comfortable with 50-70 percent of your portfolio in stocks, today’s high valuations would suggest moving toward the bottom of that range.

■ Consider investigating companies or markets that have lower valuations than the broad large markets such as the Standard & Poor’s 500, which is dominated by a relatively few big companies. Also, many foreign markets have not risen as much as the U.S. markets, and therefore some are more attractively priced.

■ If you are retired and are making regular withdrawals from your investments, consider keeping enough money in cash and short-term bonds to cover your expenses for two to three years. This strategy can offer protection when there is a downturn in stock prices. You will not be forced to sell investments at a lower price to provide income, giving you more security to ride out any storm.

■ If you have excessive debt, use gains from the run-up in stock prices to pay down some or all of it. Wiping away a large chunk of debt will improve your personal balance sheet and likely save hundreds or thousands of dollars in interest payments. The peace of mind that comes with it is a bonus.

Rejoice in recent gains, but be mindful of Warren Buffett’s timeless advice to “be greedy when others are fearful, and be fearful when others are greedy.” With stocks at high levels, it’s likely the masses are approaching greedy levels.