A Second-Half Game Plan


Every day stock prices settle at a level that balances the supply and demand for shares, and anybody who tells you he or she is certain which way the market is headed does not deserve your attention. This inherent uncertainty does not mean you should give up; it means you should stop looking for salvation in predictions — and start managing your portfolio based on a game plan that puts the odds in your favor. For our money, the best game plan is as follows:

1. Set asset-allocation targets that reflect your return requirements, risk tolerance, liquidity needs, and other unique circumstances. Don’t set stock-market exposure so high you will bail out in rough periods — or so low you will be kicking yourself for not having more money in stocks during good periods.

2. Based on the market’s primary trend and the opportunities available in individual stocks, adjust stock-market exposure on a tactical basis. Don’t shift from 100% to 0% stocks based on market swings or news, as all-or-nothing timing is among the best ways to lower drastically your long-term returns.

Considering the difficulty of timing the market and the comparatively high returns stocks have provided over the long haul, holding even 15% to 20% of your stock portfolio in cash represents a significant decision. Our recommended cash position typically ranges from 0% to 40%.

3. Relentlessly look for opportunities in all corners of the stock market. Holding only stocks you truly like is among the best ways to enhance your returns, and the best way to limit your portfolio to your best ideas is to constantly look for ways to upgrade into more attractive names.

What to watch

With valuations reasonable and operating momentum positive, subscribers should be looking for opportunities to buy quality stocks. For now, as a hedge, hold 15% to 16.3% of equity portfolios in a short-term bond fund until the averages provide greater clarity on the market outlook.

Since the closing lows reached on June 7 — 9,816.49 on the Dow Industrials and 4,037.98 on the Dow Transports — both averages have gained more than 5% and retraced more than one-third of the pullback from this year’s highs. A breakdown below the June 7 closing lows would be a reason to raise more cash, while a breakout above this year’s respective highs of 11,205.03 and 4,806.01 would reconfirm the bullish primary trend.

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