QUESTION: I’ve had a good run so far this year on my investments but wonder how long the boom will last and how to protect these gains?

ANSWER: Let’s start with a quick review of where we are. The market sold off in March 2020 as COVID-19 enveloped the country, then quickly rebounded and has since bounced way above pre-pandemic highs. Much if not all that gain was made possible thanks to low interest rates and massive government spending that kept money in people’s pockets while much of the economy was shut down.

Fast forward to earlier this year when additional government stimulus checks went out while the economy was revving up as increasing numbers of Americans were vaccinated. The market returned over 15% in the first six months. In other words, what the market has done in six months would normally take at least a year.

So, what now?

On the pessimistic side, stock valuations are stretched, leaving investors vulnerable to a correction. The threat of inflation and higher interest rates could mean any correction could be longer than a few weeks or even a few months. On the optimistic side, more federal stimulus is on the way—child tax credits and possibly an infrastructure program. And while the global economy is still sluggish, it should be ramping up as vaccine distribution increases. It’s very possible that policymakers get things right, and everything remains in the sweet spot of low interest rates and enough stimulus that the correction (if it even occurs) is short lived.

So, what should I do?

AMG recommends prudent investors diversify:

  • Large-cap U.S. stocks saw the biggest gains in the past year and consequently are possibly the most overvalued and at risk of correcting. Consider taking some profits and investing them elsewhere.
  • Mid-cap stocks have had a run similar to large-cap stocks. Some of these gains probably also should be harvested. Small-cap stocks have had a great run too, but many investors might not have enough allocation to justify harvesting those gains yet, especially if they are reducing their other U.S. equity positions. Carefully consider your position.
  • Foreign stocks are a good place to think about diversifying toward. Foreign economies, especially emerging markets, lag the U.S. in vaccinations and their economies have been slow to recover as a result. Additionally, a primary long-term threat to the U.S. market is inflation, which lowers the value of the dollar, which in turn increases the value of foreign assets. Look for opportunities to buy foreign stocks cheaper and hedge the U.S. inflation risk.
  • Cash and fixed income: Make certain you have enough of both to cover your spending for at least a couple of years. In fact, now may be a good time to stockpile even more. The extra cash can be used either as dry powder to buy after a correction or as an additional spending cushion should any correction last surprisingly long. Short-term quality fixed income can be a great cash proxy even though interest rates are still too low for any enticing returns. AMG expects bonds to be more viable in 2023, but for now they represent safety, not return.

All the above is just a general template. Any specific changes you make depend on your risk tolerance, short-term and long-term needs, tax positions and reallocations you might have recently made. Have a discussion with your AMG advisor to find your best diversification strategy.

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