Will the Stock Market Keep Climbing? Here's How to Prepare for Whatever the Future Holds

The stock market has come a long way since March of 2020.

Unless you had a crystal ball, you probably couldn’t have predicted that just over a year after the start of a devastating pandemic, the S&P 500 and Dow would be hitting record highs, corporate earnings would be looking better than ever and speculative investments like cryptocurrency would be surging.

But that’s what’s happening. And still, experts can’t agree about what it actually says about current market valuations and whether stocks will continue to rise.

Here’s what all this means for your investment portfolio, and how to spring clean your portfolio for the future — whatever it holds.

Will stocks keep climbing?

The S&P 500 rallied 76% between its March 2020 low and March of this year.

Last month Michael Batnick, director of research at Ritholtz Wealth Management, wrote that, while it’s been a good run, “Winter is always right around the corner in financial markets.”

Not everyone agrees. In a recent interview with Money, billionaire value investor David Booth said that the stock market, which has been powered by the runaway gains of growth stocks, still has plenty of room to rise.

Bill Northey, senior investment director at U.S. Bank Wealth Management, expects the strong recovery to continue for the rest of the year and into 2022, as well as for the impressive corporate earnings to continue. Valuations may be on the high side, but they’re not at extreme levels, he adds. In other words, he thinks stocks aren't wildly overpriced.

“Markets can overshoot with optimism and they likewise can become overly pessimistic particularly in the areas of sentiment and valuation,” Northey says. But, looking at fundamentals like corporate revenue and earnings, he says we’ll continue to see forward growth in 2021, especially as the Federal Reserve holds interest rates near zero and layers of fiscal policy have been applied and proposed.

But, certain areas of the market are frothy — and sprucing up your portfolio now could help you benefit from the rest of the recovery.

How to protect yourself from a stock market crash

Overall, there’s probably no need to make any drastic changes.

Economic growth and low interest rates should support stocks over the near horizon, Mark Haefele, UBS Global Wealth Management’s chief investment officer wrote in a recent note. Longer term, the advice is the same: stay invested.

The percentage of stocks you should have in your portfolio depends on how much time you have until retirement, your goals and specific financial situation. Some experts like 85% to 95% in stocks if you’re 10 or more years out from retirement, with that dropping to 70% stocks for those between five and 10 years out and to 60% for those retired or within five years of retirement, Money has previously reported.

So which stocks do you want in your portfolio right now? For years, a couple of big growth names — think Amazon and Facebook — have been dominating the market. (Even though, as Booth pointed out, value stocks on average outperform growth stocks.)

But the pendulum may be swinging the other way, in favor or small-cap and value stocks. Barry James, chief executive of James Investment Research says to make sure you have between 15% and 25% your total portfolio in small cap and value stocks, so you can benefit. It could be a good idea to keep some of the big growth names in your portfolio, but shift some of that money towards those smaller stocks, or — if you're able — put fresh cash towards those smaller stocks, he adds.

And don’t forget international stocks. Foreign markets have not kept up with the U.S. market, so there may be some opportunities there, James adds. He likes having between 5% and 10% of an overall portfolio in international markets.

It's always good to have some bonds in your portfolio, as they can be a shock absorber if the stock market goes awry (in March of 2020, Treasury bonds held their ground as stocks plummeted). But, even with bonds, there are risks.

“Fixed income is probably fraught with a lot of dangers of higher rates and higher inflation,” James says. "Maybe not immediately, but that is going to be the trend and so things that are affiliated with that might not be as prone to doing well.”

Experts typically advise that younger investors fill their portfolio with stocks, not bonds, and allocate more of their portfolio to fixed income as they age. But again: it's not one-size-fits-all.

It’s important to rebalance regularly to ensure your portfolio is property diversified, and that you’re exposed to some of the areas that could do well during the recovery. While you’re working your way through the winter clothes piled up in the closet, and finally getting to the dust that has accumulated over the long winter, now is as good a time as any to clean up your portfolio.

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