Investors have every reason to be happy about the stock market's heady gains of the last two years — the S&P 500 has risen 45.9 percent during that period.
But with your newfound wealth comes a problem, says Burton Malkiel, chief investment officer of Wealthfront and author of the legendary investment book "A Random Walk Down Wall Street."
"With rising U.S. stock prices and low volatility over the past two years, your portfolio is likely to be riskier than it should be," he writes in
The Wall Street Journal.
"The classic mistake individual investors make is to allow risk levels to increase when times are good and then to panic and liquidate their equity holdings during periods of crisis."
So now is a good time to trim your risk, which likely means lightening your stock holdings and some bonds as well.
"While no one can predict the future, stocks and bonds in the U.S. are very richly valued, suggesting that future long-run rates of return will be lower than in the past," Malkiel writes.
He suggests foreign stocks for diversification. Specifically, Malkiel recommends investors allocate at least 25 percent of their equity portfolios to foreign markets.
In addition, he suggests investors rebalance their portfolios. "Rebalancing will always reduce the risk level of the portfolio, and over the past 20 years it has also increased portfolio returns."
Meanwhile, with the Federal Reserve expected to begin raising interest rates around mid-2015, many investors are looking for stocks that can withstand the moves.
Consider low-volume stocks, which tend to outperform when the Fed tightens policy, say strategists at Goldman Sachs.
Over the last 20 years, the return of low-turnover stocks beat high-turnover shares by 8 percentage points during periods of higher interest rates, the strategists, led by Elad Pashtan, say in a report obtained by
CNBC.
"Volatility is sharply lower on low-turnover stocks than on high-turnover stocks, providing for a greater risk-adjusted return," they write.
"While seemingly counterintuitive, stocks with very high rates of turnover are more prone to fall during periods of rising volatility and declining liquidity, precisely because these stocks trade more frequently."
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