| Because investor sentiment is ultra-bullish, valuations are near record levels, and there has been a surge recently in high-risk trading activity. (Trust me. Most investors want nothing to do with meme stocks, crypto coins, or zero-dated options in a crushing bear market.) Should investors dump their stocks and run to cash? Absolutely not. That's market timing - and it doesn't work. For starters, we could always be wrong about a near-term correction or bear market. Stocks might seem expensive and then get even more so. (Bear markets rarely start simply because equities carry lofty valuations.) Or - if corporate profits surge - stocks can go higher while their valuations get lower. (For example, a company that sells for 30 times earnings, and then doubles those earnings, now sells for 15 times earnings.) A big risk is that you get out of the market... and it continues to go higher without you. Then you must decide whether to get back in. After all, you've already missed the rally. What if you buy back in just before a correction? That's why it's too risky to run to cash - and also unnecessary. There are plenty of other things you can do to make your portfolio more conservative. - You can adjust your asset allocation. Look at your portfolio in total. See how much you have in stocks vs. bonds. A 60/40 split is moderate risk. An 80/20 split is aggressive. And a 20/80 split is conservative. Anything you do to increase your exposure to bonds - while simultaneously reducing your exposure to equities - will make your portfolio less volatile.
- You can rotate into less expensive asset classes. Right now, value stocks are cheaper than growth stocks, small caps are cheaper than large caps, and foreign stocks are cheaper than domestic stocks. You can make your portfolio more conservative by overweighting these out-of-favor assets - and potentially increase your future returns as well.
- You can tighten your trailing stops. The Oxford Club generally recommends a 25% trailing stop behind most of our individual stocks. This protects both your profits and your principal. If the market heads higher, you still have all your positions and you raise your stops to protect your profits. If a stock rolls over and starts to decline, you are fully protected. When the market is frothy - as it is now - it makes sense to tighten those stops a bit. (You might use a 15% trailing stop rather than a 25% one.) That way you will keep more of your profits in a downturn - or suffer a smaller loss.
Making these adjustments keeps you in the game if times continue to be good. Yet they protect your portfolio if the market's momentum shifts. This is simply smart money management. Why? Because no one knows for certain what the market will do next. Those who think they can read the tea leaves are generally in for a rude surprise. Not just because they were wrong... but because their portfolios suffered. Remember, the goal is to make as much as you can when the market goes up... and to lose as little as you can when it goes down. As it always does eventually. There's no reason to fear this, incidentally. Bear markets follow bull markets the same way night follows day. (And that's fine because there is always another bull market behind the next bear.) The difference, of course, is the onset of night is highly predictable. The onset of the next bear market is not. That's why you should prepare for it in advance. Good investing, Alex | 
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