With the market debacle of September 2008 still a fresh memory, many investors are wondering if they should do things differently now that stocks are facing another potential selloff.
The lesson of last year's meltdown—where many stayed in the market and saw their portfolios cut in half—seems clear: maintaining a buy-and-hold strategy no matter what's going on in the markets is passe.
Market froth over the past six months, in which the major averages have risen nearly 50 percent, has sparked memories of what began last year's massive drop from the historic highs of October 2007.
But the lesson extends beyond mere caution, past running and hiding when the going gets tough. As the market goes down it will also go back up, and investors need to prepare for either eventuality, portfolio managers say.
"The market to a certain extent is Bobby Ewing in 'Dallas': The last 18 months were a big dream. The greed factor has overrun the fear factor," says Gary Flam, portfolio manager at Bel Air Investment Advisors in Los Angeles. "You see these speculative names running up 10 to 15 percent on a daily basis. It shows you the speculative fervor has returned."
"The last 18 months were a bad dream," he added. "And everybody has gone back to where they were in '07."
Yet Flam is unconvinced that a major fall like that a year ago is in the works, and he thinks investors need to be nimble enough to take advantage of downturns.
It's the reminders of what has happened since the credit crisis began, and its apex last September with the implosion of Lehman Brothers, that has inspired a mindset that investors need to be prepared for what might lie ahead.
"Longer term I think the market makes sense. I do think investors should go in eyes opened," Flam says. "I would be trimming some exposure and looking for a pullback, which I expect at any point over the next six months, to give investors a much better point to add to positions or add to exposure to the stock market."
Volatility has become part of the market's culture in ways that it has not before. The Chicago Board Options Exchange Volatility Index , while less than half its level during the worst of the financial crisis, is still high by historical standards.
As a swell of important economic news floods into the market this week, investors have grown antsy. September is Wall Street's worst month anyway, and the early results for this year's version are showing the market is demanding real growth from the economy and earnings before pushing stocks higher.
While the risk-reward scenario is probably less severe than a year ago, the sentiment for buy-and-hold that stung so many investors during the market's dramatic fall seems mostly out of vogue this year.
"I think there's greater risks than we've certainly experienced in my career in the market right now," says Matt Havens, partner with Global Vision Advisors in Hingham, Mass. "The old buy-and-hold 60/40 approach to investing is not a very good approach to be taking right here."
Havens' firm is employing a strategy that combines increased moves to fixed income along with both long and short positions to protect investors' positions.
Flam is less conservative, recommending investors back out of some of the companies that gained the most during the runup, such as financials, consumer discretionary, early cyclicals and some industrials—a popular strategy among his peers.
"We could be in a little calendar-driven bumpy path here," says Adam Sherman, president of Firstrust Financial Resources in Philadelphia. "Companies that have had real meaningful moves in the last six months, stay in the position. If you had 1,000 shares, cut it down to 600. Take some off the table, put some profits away."
Not everyone agrees.
Adherents to buy-and-hold maintain that few investors are savvy or prescient enough to time the markets, and trying to do so only risks the possibility of missing upswings.
"If you try and time these things you have to make not one right call but you've got to make two right calls," says Tim Courtney, CIO of Burns Advisory Group in Oklahoma City, Okla. "You've got to get out roughly before the market has a contraction and you've got to get back in before the market moves higher again. You've got be right twice to benefit from that, and I think that's too hard to do."
In fact, Courtney believes if anything investors should be looking to build positions, particularly in small-cap companies both in the United States and abroad.
The only other change he suggests is possible rebalancing in the event that portfolios have become too weighted toward stocks because of the rise in the market.
The lessons of 2008, though, remain heavily on the minds of investors, and the new volatility has investors wary of missing opportunities.
"Historically the market goes through very long periods of time without making significant advances," Havens says. "People who have a buy-and-hold approach may get more tested than they think they will over the next five to 10 years."