Today, we're discussing the current state of the market, which has seen impressive returns since last Halloween. The focus today is on the importance of maintaining discipline not just in downturns but also during strong market periods. Alex kicks off by highlighting the significant growth in the capital markets in 2023, following a challenging year. The S&P 500's substantial gains, especially in the last few months of 2023 and into this year, underscore the market's strong performance. This surge is attributed to decreasing inflation expectations and a boom in tech and AI sectors, lifting the broader market.
Alex points out the necessity of rebalancing investment portfolios more frequently in such a bullish market to stick to original allocation targets. This is because different asset classes may not move in tandem, potentially skewing the portfolio away from its intended balance. However, he cautions against over-rebalancing, especially in taxable accounts, to avoid unintended tax liabilities, including the wash-sale rule. Rebalancing is about adhering to the original strategy, not changing it.
Ed then shifts the conversation towards the psychological aspect of investing in such an environment. He stresses the importance of remaining cool-headed, noting that emotional investment decisions often lead to poor outcomes. Recognizing that all market runs eventually end, he advises investors to enjoy the growth but not become emotionally attached to it. Ed warns against the dangers of chasing performance and altering a well-diversified portfolio in pursuit of higher returns, using the late '90s tech bubble as a cautionary tale. He concludes by encouraging continued investment through dollar-cost averaging, highlighting the risks of trying to time the market and the potential to miss out on significant gains.
In summary, our advice in this strong market is to appreciate the gains, continue rebalancing, and stick to your investment plan. It's crucial to prepare for all possible outcomes, recognizing that while the market's current trajectory is upward, it will inevitably shift at some point.