The stock market seems to have soared to unsustainable heights. Since the start of the year the S&P 500 is up almost 16%, the Russell 2000 is up a whopping 31% and technology stocks seem to be leading the way. Bonds remain in the doldrums, up only 1% in the same period.

Sounds like 1999 doesn’t it? It’s not; it’s the market performance through the first eight months of 2003. No wonder gun shy investors are anxious to run and stuff their money in a "safe" bank CD. That would be a mistake.

The market has rebounded in what is quite likely an unsustainable way. 2003 will be considered a good year for stocks even if the market sells off slightly over the remainder of the year. Fresh cash put in the market today could very well produce losses by year end, however, you do not want to start taking your money out of the market. If the past few months teach you nothing else, try to take these two lessons to heart. Number one, at the start of this year few predicted that the stock market would do as well as it has. If you attempted to time your reentry into the market you more than likely got left out. Over the longer term market timing does not work! While it is OK to average in with new cash, you must stay invested if you are in it to win over the long term. Even if you get lucky and pull some cash out of the market before a correction, it’s unlikely you’ll get it back in at the right time. The second lesson is obvious if you’ve been doing it already. Rebalance whenever there has been a sustained move in the markets. If you rebalanced as you should at the start of this year, you sold some of your appreciated bonds to buy stocks and were handsomely rewarded as a result. Well now it’s time to rebalance again and sell some of your highly appreciated stocks and buy relatively cheaper bonds. With stocks up on average around 20% since the start of the year, the need to rebalance is obvious. Why not just park it in cash? Because you’ll earn at least a percent less that the rate of inflation as you wait for the market to turn. In addition, if the market deteriorates badly for some reason bonds could still rally, income you’ll need to help offset losses elsewhere.

This is not the time to cash out but rather the time to rebalance. If you have new cash you are trying to get invested then use the extra cash to add to positions to get your asset allocation back on target. Averaging in is a very good strategy for new cash you already have, just don’t liquidate your portfolio and try to average in later, between inflation and the inevitable "cold feet" we all get in a weak market, it’s very unlikely you’ll come out ahead. If you have a target allocation, rebalance and stick to it. If you don’t have a target allocation, work with your advisor to get one and stick with it. In the long run you will thank yourself.

Randy Gridley

September, 2003