'Do Half' Applied

by: David Merkel, CFA

Four major stock indexes, the DJIA, S&P 500, Nasdaq, and Russell 2000, close at records on the same day. From that same article, Ryan Detrick, senior market strategist for LPL Financial, said that it was the first time all of those indexes set records on the same day since December 31, 1999.

For those that missed the rally, do you feel bad about it? Regretful? Really, it's too bad that the bear bug got you to the degree that you acted on it. Those who have read me for a long time know that I often sound bearish, because I am natively bearish. But I don't let it force me to take aggressive actions. There is a point where I will hedge everything, but that is around 2,600 on the S&P 500 at present. I sit and worry a little, let Portfolio Rule Seven trim a little as my stocks hit new highs, but I won't let cash go over 20% - we're at about 16% now. After I Bumped Against My Upper Cash Limit, I bought more stock - good thing too, at least in the short run.

If you think this is all a mirage, and there aren't any structural reasons why the market should go any higher, and you are not going to do anything here - well, good for you. Maybe you are right, and you can buy lower someday. Just don't get jumpy if the market continues to rise, and you don't have much in the game (To those so inclined, don't be macho fools and try to short into new highs - wait until there is some blood on the sword before shorting, something that I almost never do because of the bad risk/reward trade-off).

But if you are feeling jumpy and think you should get in on the action, let me give you two words: "Do Half." If at normal valuations you would have 60% of your assets in stocks, and you have nothing in stocks now, don't take position above 30%. Go up to half of a normal position. If things continue to go up, you will be happy you have something in the market. If things go down, you can bring it up to a full position on weakness, and be grateful you didn't go up to 60% all at once.

Now, I'm not telling you to buy anything, invest with me, or anything like that. I just know that regret is one of the most powerful forces in the market, and lots of people make stupid decisions under its influence. Rules that I use, like "Do Half" and the portfolio management rules, are designed to keep me from making rash decisions influenced by my emotions.

The same "Do Half" rule could be applied to lightening up on bond positions and other matters, like raising cash or edging into commodities (I am doing neither of those now - they are just examples from others that I know).

The main idea is to be self-controlled, and not let emotion drive you. Investing is a business; determine your policies, and act on them, whether you do it yourself, or farm it out to others. But if you feel that you have to do something now, then my advice to you is "Do Half."

Disclosure: None