3 Easy Stock Portfolio Changes to Make if You Think a Bull Market Is Unsustainable in 2024 | The Motley Fool (2024)

A new bull market had been hinted at for several months now, but it became official on Jan. 19 when the S&P 500 closed at a new all-time high. The S&P 500 had already climbed more than 20% from the bear market low set back in October 2022. Clearly, the stock market is on a roll of late and the bulls are back in charge ... for now.

Even with all the market enthusiasm going on, there are always some investors out there who appreciate the highs but want to be prepared for the inevitable lows that come along. If you are in this cadre and think a rally will be difficult to sustain in 2024, there are plenty of things you can do to ensure you aren't taking on more risk than you're comfortable with.

Here are three easy changes you can make to take advantage of the best of times (in the market) while preparing for the worst.

1. Beware the pitfalls of correlation

The first step you can take is to conduct a portfolio review and see how exposed you are to different sectors or industries. Just because a portfolio includes many stocks doesn't mean it is diversified. For example, Warren Buffett's Berkshire Hathaway holds stock in over 50 public equity holdings. However, over 75% of the value of that portfolio is concentrated in just five stocks. Granted, these are high-conviction positions. But still, the performance of the holding company's portfolio is going to depend on those heavily weighted positions.

It's not just overweighting certain positions that you want to be careful of -- it's also the correlation between different companies. In the short term, certain kinds of stocks can "trade together," which can amplify losses. It's no surprise that close competitors like Enphase Energy and SolarEdge Technologies tend to be correlated. But what may surprise you is the correlation between Nike and Starbucks, for example.

Nike and Starbucks are two completely different businesses, but they are similar investments. Nike and Starbucks are seen as industry-leading, moderate-growth, dividend-paying companies. They aren't going to shock the market with blistering returns, but they also shouldn't suffer steep sell-offs. However, both companies are tied to the ebbs and flows of the broader economy and discretionary spending on goods. And because of that, it's understandable that they are viewed as similar investments and can trade together.

As Berkshire Hathaway shows, it's not necessarily bad to concentrate on a few stocks or "types" of stocks. Rather, it's vital to understand how this allocation will play out in different scenarios. If you're invested in Starbucks, Nike, and similar types of stocks, you may generate a decent amount of dividend income and achieve stable returns over time. But you'll probably underperform in a growth-led market like we saw last year while also having a good chance of limiting losses during a steep sell-off.

2. Build your cash position the right way

Another change you can make if you want to be prepared for a market sell-off is to keep a meaningful cash position and allocate a certain amount of new contributions to your investment account(s) in cash. If there is a correction, you can use that cash to buy companies on your watch list.

Devoting future deposits to cash also prevents the headache of deciding the positions to sell now to raise cash, which includes tax consequences and the future regret that may come with selling a stock to raise cash.

Bear markets can lead to lasting wealth for investors who hold through periods of volatility and routinely contribute new cash flow to their portfolios. But one of investors' mistakes is trying to time the bottom of a sell-off. For example, if you spent 2020 trying to time the COVID-19-induced sell-off, you would have missed the strong market performance in 2020 and 2021. Or, in 2022, if you sold stock to raise cash to combat the broader market decline, you would have missed out on 2023's epic rally.

In general, it's better to build positions over time instead of jumping in and out of what is or isn't working.

3. Invest in a company first and the stock second

Finally, make sure your reason for owning a stock isn't to ride short-term momentum but because you believe in the company longer term. It's one thing to do nothing when times are good and your portfolio is increasing in value. But what happens when stock prices are flashing red with no end in sight?

During these challenging moments, having conviction in a long-term investment thesis can be the difference between selling a stock at a bad time and unlocking future gains. The classic expression, "bulls make money, bears make money, pigs get slaughtered," refers to the dangers of being greedy in the stock market.

If you know why you own a company and what you expect from it long term, you stand to make better decisions when the chips are down than if you're trading stocks to make a quick buck.

Take ownership of your investments

Just because you think the market will fall doesn't mean you should revamp your entire strategy or gut your portfolio. Making portfolio changes doesn't have to involve buying and selling stock. The ideas discussed have more to do with the psychological and financial planning side of investing.

However, if you do find your portfolio dangerously overallocated to a particular theme, super low on cash or with no cash, or worst of all, leveraged up on margin, then now may be a time to consider making the necessary moves to ensure you are still participating in the market but in a balanced way that can prevent a catastrophic financial mistake.