Despite a few bumps in the road, the stock market has been on a fantastic run lately.
Over the past year, the S&P 500 has climbed almost 17% and has hit an all time high.
As a pharma employee, you might look at the current market and think…
Okay, now what?
Do I take the money and run? Or do I leave my stock portfolio alone and hope it continues to grow?
First of all, trying to time the market by selling all your stocks is usually a bad idea, whether we’re in a bull or bear market.
As the saying goes, time in the market is better than timing the market.
But even though selling all your stocks isn’t a good idea, that doesn’t mean you need to sit on your hands and do nothing.
Today, I want to look at a few smart strategies that pharma employees might be able to use during the current market boom.
Reallocating Your Portfolio
Everyone loves it when the stock market goes up.
But did you know that strong stock returns can inadvertently throw your investment strategy out of whack?
Here’s why: your portfolio is allocated between several different asset classes, like stocks, bonds, real estate, etc…
And when stocks grow much faster than those other asset classes, you can accidentally end up taking on more risk than you anticipated!
Imagine I start out with a $10,000 portfolio 60% allocated to stocks and 40% allocated to bonds.
Over the next year, suppose that stocks return 25% while bonds return just 5%.
As a result, my stock position has grown to $7,500 while my bond position has grown to $4,200.
Running the numbers, you can see that stocks now comprise 64% of my total portfolio – without me making any changes to the investment strategy.
A 64% allocation to stocks isn’t necessarily wrong.
But it does involve more risk than a 60% target allocation and might not be aligned with my investment strategy.
As a result, I might want to “reallocate” my portfolio by trimming down the stock position and reinvesting the proceeds into my bond position.
This dynamic is why I always encourage investors to take a closer look at their portfolio allocation when the stock market has had a good run.
By strategically reallocating your portfolio, you can make sure that a desirable outcome (strong stock returns) doesn’t accidentally lead to an undesirable one (taking on more risk than you want).
Selling RSUs at High Valuations
Next, I want to talk about a common compensation benefit in the pharma industry: restricted stock units, also known as RSUs.
When RSUs vest, they become normal shares of stock in your employer.
In a recent blog post, I laid out a few of the reasons that I think selling these shares generally makes the most sense.
But in discussing this idea with clients, I sometimes get pushback – especially when the price of their shares has fallen recently.
Here’s why: there’s a natural tendency among investors to avoid selling assets that have declined in price, an idea that academics call the disposition effect.
Investors want to avoid “locking in” losses, hoping that the price of these assets will eventually rebound.
While this tendency is understandable (who the heck likes realizing losses?), sometimes the right financial move really is to sell losing assets.
Right now, though, a booming stock market probably means that vested RSUs are trading at a good valuation – and the disposition effect won’t be very powerful.
Not all pharma companies are performing as well as the overall market.
After all, just because an index has gone up doesn’t mean that each individual company in the index has also gone up.
But the odds are that if you’ve been waiting for an opportunity to sell those vested RSUs, now might be a good time – since you probably won’t need to realize losses to do so.
Taking Out a Securities-Based Line of Credit
The first two strategies I discussed were about taking advantage of rising valuations to sell shares of stock.
But this third strategy works a little bit differently.
Here, I’m talking about using rising valuations to borrow against your shares of stock – with a Securities-Based Line of Credit (SBLOC).
If you’re familiar with a Home Equity Line of Credit (HELOC), a SBLOC works pretty similarly.
Instead of being collateralized by your home, though, this form of borrowing is collateralized by your stock portfolio.
And here’s the thing about SBLOCs: the amount you can borrow depends on the value of your stocks, just like the amount you can borrow in a HELOC depends on the value of your home.
That means when the stock market has gone up, you might be able to use an SBLOC to accomplish a wider range of goals – including renovating a house, paying a tuition bill, or some other major expense.
Of course, it wouldn’t make sense to take out a SBLOC just because the market has gone up…
But when stocks are on a good run, SBLOCs become a more flexible and valuable tool.
So, if you’re planning on borrowing to finance a large purchase, they’re certainly a tool worth considering right now.
Why The Specifics Matter
If you’re a pharma employee looking to take advantage of the current bull run in stocks, the three ideas we discussed today can be smart strategies in general.
But whether or not they really make sense depends a lot on your specific situation.
If you want to talk through your individual circumstances and get tailored advice, feel free to reach out and set up a call today.
Everyone’s investment goals and financial circumstances differ – which is why I don’t believe in a one-size-fits-all approach.
And if you’d like to get the most out of your situation?
Schedule a call with me.
It is only 30 minutes, doesn't cost anything, and there are no obligations to do anything after you call.
