Should I sell and go to all cash?

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Q. I’m starting to get nervous that the stock market won’t keep going higher without a major correction. I’m 57 and invested 50-50 in stocks and bonds, and I plan to retire at 65. No pension. Should I get into all cash now to save my money?
— Nervous

A. We’re glad you’re aware of your investments, but don’t make any rash moves.

Studies have shown that it is impossible to consistently time when the stock market is going to go up or down, said Chip Wieczorek, a certified financial planner and investment advisor with Tradition Capital Management in Summit.

The most recent example of this was the U.S. presidential election, when just about everyone predicted the stock market would pull back considerably if Trump was elected and the exact opposite happened, he said.

So the short answer to your question is no.

“What you should be concerned about is how much risk does your portfolio have?” Wieczorek said. “If the optimal target for your risk tolerance is 50/50 stocks and bonds, then stick with that allocation, but keep an open mind.”

Most investors just look at return, but Wieczorek said risk and correlation are just as important.

First, let’s talk about risk.

For example, one of the more popular sectors over the past decade has been utility stocks.

“These stocks are understandably appealing for their dividend income in this low rate environment, however, most clients don’t realize that they are trading at a large premium from a few years ago which has increased the risk of those stocks,” he said.

As for correlation, if an investor holds value, growth, international and emerging market stock funds, they are diversified, but the portfolio is also highly correlated, which means the investments will move in the same direction, Wieczorek said.

That type of a portfolio will only reduce risk a small amount as we saw during the financial crisis, he said.

So what should an investor do?

Wieczorek said an uncorrelated and diversified portfolio will reduce risk even further.

“Our firm has constructed these lower risk portfolios by adding non-correlated asset classes like reinsurance, private real estate, variance risk strategies, market place lending and select mortgage bond funds,” he said. “These asset classes were only available to foundations, institution or ultra-high net worth investors, but in the past few we have gained access which has helped us lower risk in our client portfolios.”

While all investments could lose value in the future, the best way to reduce risk in a portfolio is by mixing together non-correlated assets, he said. Assets that have little to no correlation to the stock or bond markets, or each other, can reduce the volatility of a portfolio significantly.

“I also recommend rebalancing those portfolio components consistently, annually at a minimum, as an additional step to limit risk,” Wieczorek said.

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This story was first published in May 2017.

NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.