Stock Market Highs -- Now What?

The stock market has reached all-time highs. Now what?

Many are asking, " How high will the market go?" Forecasts of Dow 20,000 are being heard. But, the real question should be: What do I do with my portfolio now - given my own personal circumstances?

No one can tell you for sure how much higher the market will go - or what could trigger a sharp decline. There are good arguments on both sides. Each rationale makes sense, for a while. So take a realistic look at both sides, and at your own situation.

The bullish argument says that money moves markets. And there is plenty of money sloshing around the world, looking for safety and a good return. Safety is a big issue, especially in Europe where Italian banks are struggling and prospects for the Euro look dim.

The search for higher yields is global. With Germany selling its 10 year government bonds at a negative yield, and roughly 35 percent of the world's government debit now yielding negative returns, you can see why there's demand for the U.S. dollar, and for U.S. stocks.

The bearish argument says there is just no good reason for stock prices to be this high. Business isn't growing that strongly, productivity is falling, wages are moving up only slightly, and earnings aren't booming. But the market is ignoring that argument - so far.

Of course, markets always move to extremes based on investor sentiment of fear and greed. The CNN Fear & Greed index is now at 86 -- its highest level since spring, 2014. And the VIX, a measure of volatility and typically aligned with fear, is now at the lowest level in two years - a sign of complacency.

So you have two choices now - either to close your eyes and hope the market goes higher, or to do a little portfolio planning of your own. It's far better to reallocate your profits when the market is making new highs. Here are five things to remember:

1. Market history is on your side over the long run. There has never been a 20 year period when you would have lost money in a diversified portfolio of large company American stocks with dividends reinvested, even adjusted for inflation. That's a Morningstar historical fact. That "portfolio" is the S&P 500 fund, which is likely in your 40l(k) plan. Do you have a 20 year time horizon for at least a portion of your money? Then time and history are on your side.

2. The stock market is broader than just the S&P 500 fund. There is likely a more conservative stock market choice in your 40l(k) - an "equity-income" fund, or a "balanced fund," which holds a mix of dividend-paying stocks and short term bonds. This fund will also decline in a market crash, but less than a pure stock fund because of the income cushion.

3. Bonds are a dangerous alternative. Today's investors have never seen the damage a spike in interest rates can cause. When rates rise, bond prices fall. For example, if interest rates were to rise 3 percentage points, the price of a 10-year U.S. Treasury bond would fall 25 percent! Bonds have risks, too.

4. Safety has a cost. "Chicken money" sits on the sidelines in money market funds, short-term bank CDs, and Treasury bills ( earning next to nothing. That's the price of peace of mind. Most 40l(k) plans don't offer this conservative choice, since they are designed for long term growth of retirement money. So you might need to hold your "chicken money" outside your retirement plan to balance the long-term growth in stock funds.

5. The "top" is only obvious in hindsight. Don't procrastinate in re-arranging your portfolio. There's an old Wall Street saying: "No one rings a bell at the top."

There always have been and there always will be market "crashes." Next time around, let the uninformed be the ones to panic, while you stay appropriately allocated for your own future - and sleep well at night. That's the sign of a successful investor. And that's The Savage Truth.