You can't control whether or not the yield curve inverts, all you can do is control your own potential for market complacency. I think it is time for a gut check. In accounts I manage, I’m still mostly in stocks but I am changing sector exposures to be more defensive. But if you’re not inclined to invest like a portfolio manager, then the best you can do is to rebalance according to your risk tolerance.
Last February, stocks got slammed and investors were nervous. They should take that as a reminder that when markets change direction, they can do it fast. Don’t just rebalance as a function of the gains particular sectors have made, also do it according to age, and the fact that you and many other investors are 10 years older since the Great Recession. Otherwise, you may be rebalancing into a portfolio that is still too aggressive.
We’re in the beer muscles phase of the bull market. Everyone is braver than they should be. That’s what overconfidence does. The better investors do, the more they think they are taking less risk, even though the opposite is often true. And it only makes matters worse when they don't understand complex relationships like the spread between short and long-term bonds. What sounds like it is only for the technical analysts will without exception still whipsaw every unprepared portfolio.
—By Mitch Goldberg, president of investment advisory firm ClientFirst Strategy