Stocks are struggling to get out of the red. The Dow Jones Industrial Average and S&P 500 posted their first back-to-back declines since January over the first two days of this week. Pundits and hedge fund managers are worried about a rally that's overheated — using varying degrees of "bloodbath" hyperbole and more measured hedging strategies — some see a pullback of at least 5 percent to 7 percent coming. But here is what worries me: the concerns expressed by individual investors. The number of calls I receive from 60-plus people about a potential correction happen every so often. But the pace has definitely picked up a bit lately.
So what if we're in a stock market bubble that's about to pop?
Regardless of an asset allocation that is presumably appropriate for your risk tolerance, a drop in stocks would certainly be more than enough to blow a big hole in your income planning. And you would feel even worse, because you convinced yourself that you learned your lesson twice — the market crashes in 2000 and 2008.
Now is the time to answer a simple question: How do I reduce my risk without giving up on more potential upside?
You can't hold on to upside potential if you go to cash. But you can temporarily move to cash while deciding on your next portfolio moves. Look, consider yourself lucky to be able to have recent profits to park in cash, especially if you said during those last two crashes, "The next time I get back to where I was, I'm getting out!" Taking profits after a big run is not the same as being under-invested or missing out on the market. Plus, the Federal Reserve is sending the strongest signals yet that it is determined to raise short-term rates more aggressively.