For the stock market, new record highs are becoming the usual.
The S&P 500 closed at a record high on Tuesday while the Nasdaq topped 15,000 for the first time ever. But nowadays, new all-time highs don't feel all that special or new. This was the 50th record close of the year for the S&P 500, a benchmark commonly used to measure the broader stock market.
Stocks have made a significant recovery since their pandemic lows in March of 2020, with the S&P 500 up around 100% since that time. The market has been bolstered by the economy's speedy recovery, thanks in part to stimulus checks and near-zero interest rates, as well tech giants like Apple and Facebook benefiting from stay-at-home orders and a surge in new investors while everyone was stuck at home.
When the market is on fire, it can be tempting to take action — but making a change to your investment portfolio right now might not be the best move for you. Here are three insights from financial advisors to keep in mind.
1. Remember that the S&P 500 and Nasdaq are not the entire stock market
Yes, we commonly use these benchmarks as a way to gauge how stocks are doing overall. But it's important to remember that the S&P 500 and Nasdaq aren't actually the stock market, says Mark Wilson, president and founder of MILE Wealth Management in Irvine, California.
The S&P 500 and Nasdaq look expensive right now, which means we could expect lower-than-average returns over the next several years. But other areas of the market, like U.S. value stocks and emerging market stocks, look more reasonably priced, he adds.
"Celebrate the great returns for U.S. large-caps, take profits and diversify into asset classes that are more attractive," Wilson says.
2. Consider rebalancing
When markets are at all-time highs, it is a good idea to review your investments and see if rebalancing is needed, says Anjali Jariwala, founder of FIT advisors in Redondo Beach, California. (Rebalancing refers to selling investments that have increased in value and replenishing investments that have decreased in value to get your portfolio back to holding its target weights.) The idea is to make sure your portfolio isn't too concentrated in one basket, like large tech stocks.
"It is easy to think that markets will continue to go up indefinitely, but markets are cyclical so having a more diversified portfolio helps to reduce downside risk," Jariwala says.
Keep in mind that some employer-sponsored retirement accounts don't automatically rebalance. So when reviewing your portfolio, don't forget your retirement plan, she adds.
3. Invest based on your timeline and goals
Whether or not you should adjust your portfolio at market highs depends on your investment goals, financial situation and how much time you have until retirement. If you are retired or older and close to retirement, it might be time to pull some gains out of the market and get into safer assets, says Jordan Benold, an advisor at Benold Financial Planning in Prosper, Texas. On the other hand, if you're younger, you'll see a lot more volatility in your lifetime, so it's probably best to ride it out.
And consider any major purchases or significant cash expenditures that lie ahead in the next year, says Nicole Gopoian Wirick, president of Prosperity Wealth Strategies in Birmingham, Michigan. Now might be the time to get that money out of the market. Could the market go up in the meantime? Sure — but it could also go down, and you may regret not selling at the highs when you had the chance.
"For most humans, the pain associated with loss outweighs the pleasure associated with gain," Wirick says. "Especially when it comes to something as important as financial security."