At current market levels, I am bearish. That doesn't mean I'm always bearish, but the relative upside in the equities markets is much less appetizing than potential pain of the downside risk. Given how dynamic the market is, that can change.
Many people confuse the stock market with the economy. The economy is currently firing on all cylinders- no question about it. The stock market, on the other hand, is a reflection of what is expected in the future. Usually when "all the stars align" in the economy, such as low interest rates, low unemployment, robust consumer spending, it tells me that we are cresting the top of the hill. That is a red flag for me.
That being said, I find it better to not be greedy after a super run of the stock market. This means shifting to a less exposed positions of safer defensive securities, increasing cash and keeping a margin of safety. I have always believed in the long term benefits of equity investments, so I am not selling - just adjusting. Gentle shifts are always the best policy in my mind. The stock market has always comes back after a drop.
The question is “can a portfolio survive a fall in the economy”? Are holdings over the edge with excessive debt? I've had a few bankrupt holdings. It is not pretty. Second, are investors mentally prepared for a drop? Buffett and Munger saw holdings drop 50% several times in their careers. Even the best investors struggle mentally with self-doubt when market downturns occur. Staying the course can pay back in spades. Finally, market downturns can be short or very long. Being prepared to weather an extended downturn is part of mental and financial preparation.
Having a good amount of cash for "rainy days" is important. Investors may be able to squeeze out some extra return by fully optimizing their portfolios and minimizing cash in a bull market. But...when the winds turn south, they will not have the cash to "buy the sales" without selling holdings (Did you ever wonder why Berkshire Hathaway is holding 100B in liquidity?).
Be safe, be smart, be prepared, and be successful!
