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Scott Neal

Scott Neal, CPA, CFP, is the president of D. Scott Neal, Inc., a fee-only financial planning and investment advisory firm with offices in Lexington and Louisville. Reach him at or by calling 1.800.344.9098.

New Highs: What to Do Now!

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Some people look at the S&P 500 at 2,000 and the DOW at 17,000 and feel that they have missed the boat by not being more heavily invested in equities. They want to jump in now. Others believe that because we are at all-time highs in the stock market that now is the time to sell. The kind of returns experienced in 2013 were never supposed to happen, statistically speaking — we of course, accept them more readily than the recession-induced catastrophes, a la 2008. But we know all too well that the Perfect Storm did happen in 2008 and that the Fed fueled the recovery with unprecedented levels of quantitative easing!

It is easy to find varied and conflicting opinions about what to do, and often the opinions are changing weekly, if not daily. Many investors, as well as advisors, are saying simply, “Stay the course with your current investments, rebalance to a chosen asset allocation and all will be well.” That is quickly followed with the admonition to “continue your contributions to retirement plans in the same way that you have been doing all along.” Others are saying, “Everything is overvalued. Sell stocks!” That advice might prove to be accurate in due time, but you must ask whether such advice is truly in your best interest or simply in the best interest of the advisor.

We believe that you must first ask and answer an important question that is truly unique for each person and family. The question: What is the vision for my family and how will my financial strategies, tactics, and tools support that vision? Your investment strategy should become an integral part of the answer.

Developing an appropriate investment strategy for times like these demands a certain amount of self-exploration, as well as consideration of the data that reflects the current environment. It’s easier to deal with gathering knowledge, so I begin there. Based on what we have learned from the Greater Recession and the years that have followed, what can we say about our current situation? Quantitative easing by the Fed is being curtailed. Europe is beginning its own version as ours winds down. Unemployment is down to 6.1 percent, and the economy, while turning in a couple of good quarters of growth, is marked by a high level of volatility. The data seem to support a rosy outlook, but the US may well be only the best looking house in a bad neighborhood.

The next step of the data gathering process is to assess your own current situation and to prepare a projection for 2015 and beyond. The projection should be based on where you stand now and applying some reasonable assumptions about the new year and beyond. It is important to take note of your assets and liabilities, as well as cash flow, and to allow this data to inform your short-term decision making.

Turning to self exploration, the relevant questions regard risk tolerance and risk capacity. To the extent that you have adequate liquidity, that you have little or no debt, and that you are living within your means, you have considerable risk capacity. The current state of the market might be unduly raising your risk tolerance right now. It’s worth mentioning that much of investment theory has been built on the assumption that the market has no memory from one year to the next. Given that we investors make up the market, that now seems instinctively an invalid assumption. Most of us still hold onto memories of 2008 and/or 2013. Which one prevails in your mind is key.

Once these steps have been completed, you must formulate an appropriate investment strategy for moving forward. Note that no investment strategy is completely risk free. Tradeoffs typically have to be made between one type of risk and another. Most investors are presently obsessed with only one: market risk. However, there emerges two strategies: 1) a wealth growth strategy and 2) a capital preservation strategy. The wealth growth strategy would be more appropriate for those investors who have a longer time horizon and relatively high risk capacity and tolerance. A capital preservation strategy would be appropriate for those with lower risk capacity or tolerance and certainly for those with a shorter time horizon. Some blending of the two may be in order for the average investor.

Most investors today want two things: protection of the wealth that they have accumulated, while getting market-like returns as the market goes up. One of the ways to get there is to invest in a diversified asset allocation, yet with risk controls that have the potential of protecting the capital from suffering serious drawdown as the market retreats from each new all-time high. In essence, it is a strategy of “cutting losses while they are small, and letting winners run.” That means it is critical to know why you are buying or holding a particular asset, and to have a good reason for the timing and price of its purchase, as well as its sale.

We realize that answers to all financial questions are currently evolving at a rapid rate. Now, perhaps more than any other time in recent history, as advisors we have found the need to be more flexible in our thinking. Our advice is that you do the same. One of our goals is to enable each of our clients to think more clearly in a world that is full of noise. Call or email us if we can help.


Scott Neal, a CPA and CFP, is president of D. Scott Neal, Inc. a FEE-ONLY financial planning and investment advisory firm with offices in Lexington and Louisville. He can be reached at or toll free at 1-800-344-9098.