Is Your Stock Portfolio 'Too Long'?

Is Your Stock Portfolio 'Too Long'?

Investors certainly have plenty to be thankful for this week. The SPDR S&P 500 ETF Trust (NYSE: SPY) is up 16.4 percent year-to-date, and the U.S. economy is firing on all cylinders.

But according to CNBC analyst Jim Cramer, it’s never a bad time to prepare for the future. After an eight-year bull market in U.S. stocks, Cramer says many investors should make sure they are not “too long” when the next market downturn occurs.

Stocks Aren’t Houses

Being too long is a scenario in which investors have all their cash already invested in the stock market, Cramer said. When share prices start to fall and prices get cheap, they are forced to either watch on the sidelines or borrow money to finance stock purchases, which Cramer said is an unwise decision.

"Stocks aren't houses,” Cramer said earlier this year. “You can't fall back and live in them if you have mortgages on them. They just get taken away.”

Diversification Is Key

For investors who may be too long, there are a number of simple steps to take to prepare for the next market downturn. First, don’t have 100 percent of a portfolio invested in stocks. Bonds and commodities such as gold can provide returns on investment and have enough liquidity that they can be easily sold if better opportunities arise.

The iShares IBoxx $ Invest Grade Corp Bd Fd (NYSE: LQD) has only about a 16 percent correlation to the S&P 500. The SPDR Gold Trust (ETF) (NYSE: GLD) has a relatively low 22 percent correlation.

Even high-interest savings accounts are paying up to 1.4 percent interest these days, according to Bankrate.

Have A Plan

In addition to dialing back stock market exposure, Cramer said investors should have a short list of their favorite stocks ready to go so they can pull the trigger and be ready to buy when share prices fall.

Investors who manage their own money have a unique flexibility advantage, but they have to have the funds available to buy and sell on short notice to capitalize on that advantage. If every last cent in your portfolio is already invested in stocks, you’ll have some difficult decisions to make when the next recession hits.

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