With the stock market near record highs, investors may be itching to go all in — but the last thing they should be is reactionary, according to financial advisors. Stocks moved higher on Wednesday, with the S & P 500 hitting a new intra-day high. On Monday, both the S & P 500 and Nasdaq Composite closed at record levels. Despite the volatility that hit the market this year, the three major averages all ended the second quarter on Monday with solid gains. Growth stocks have outperformed value stocks so far this year, with the iShares S & P 500 Growth ETF returning 7.57% and the iShares S & P 500 Value ETF ahead 4.21%. Those that try to figure out what the market or different sectors may do next are taking the wrong approach, because you can’t predict what is going to happen, said certified financial planner Carolyn McClanahan , founder of Life Planning Partners and a member of the CNBC Financial Advisor Council . “Sometimes things are going to cool off and you are going to regret trying to chase the market and making decisions based on current market behavior,” she said. “The smart thing is to have an asset allocation already determined in advance — and that should be based not on what the market is doing but on what your goals and needs are.” There tends to be general themes permeating the market at different times — and these days it is policy from Washington, D.C., said Adam Reinert, chief investment officer at Marshall Financial. “Trying to time that has been a bit of a fool’s errand this year,” he said. Case in point is the nosedive the market took after President Donald Trump announced his reciprocal tariffs in early April, which caused some investors to shift more defensively, he said. But that wound up being the wrong move since the market recovered, he said. In fact, investors should check their allocations after the recent run up to maintain a diversified, all-weather strategy, Reinert said. “With recent equity performance obviously improving from April 2, if the equity portion of an investor’s portfolio has appreciated and has skewed risk more aggressively, then it could be a good time to realign risk more in line with their risk tolerance,” he said. Grabbing income with dividend stocks Dividend stocks become more appealing to investors during rocky markets. However, they can play a role in an overall diversified portfolio even when conditions are less turbulent. In fact, investors should think about the total return of their portfolio — income plus capital appreciation, said Marguerita Cheng , CEO of Blue Ocean Global Wealth, a certified financial planner and another member of the CNBC Financial Advisor Council. She cautions against only thinking about income when the markets get shaky or moves down. “Including dividend payers in your portfolio can level out the volatility, but I want people to think about total return investing — which means that you have growth and value in there — and that provides you a little bit more flexibility,” she said. An allocation to dividend stocks may become more important as people approach retirement and need income. McClanahan likes passive index funds for equity allocations. That can include those that follow broad market indexes — such as the S & P 500, small-caps and international equities. For those who are seeking income, she prefers bonds over dividend-paying stocks. She likes municipal bonds, which are free of federal taxes, and investment-grade corporate bonds. Reinert also likes fixed income over dividend stocks for investors seeking income, since they are getting paid more with bond yields right now. He maintains a broad exposure to the fixed-income market, including corporate bonds and core bonds. Building buckets Chuck Failla, founder and CEO of Sovereign Financial Group and also a certified financial planner, breaks down clients’ portfolios into buckets based on financial needs — and sticks with it. “We really think that you should never make any changes to your asset allocation in a reactionary way,” he said. “If you’re reacting to the market, in my opinion, it’s already too late.” “Your asset allocation should be driven by — when do you need to use that money,” he said. Money earmarked for the next 12 months should not be in the stock market at all — and should instead be in a money market fund or certificates of deposit, he said. Money needed in one to two years typically is in 10% equities and 90% fixed income, he added. The bond portfolio should skew towards high-quality, short-duration assets, while the stock allocation should focus on blue chips and high-quality dividend payers with a proven track record of growing their payouts. For instance, the ProShares S & P 500 Dividend Aristocrats ETF is composed of companies that have grown their dividends each year for at least 25 years. NOBL 1Y mountain ProShares S & P 500 Dividend Aristocrats ETF year to date The next tranche of three to five years raises the equity portion to 30%, and for six to 10 years is a 50/50 split. However, that is where Failla is prone to shift allocations to 75% if there is a pullback in the S & P 500 and market conditions are right. Portfolios earmarked for use in 10 years hold up to 90% to 95% in equities and also includes allocations to alternative investments such as private equity and private credit. In the longer term buckets, more aggressive growth stocks can be added, he said.
