Tag Archives: portfolio-strategy

Market Timing Risk

Market timing, i.e., when attempting to trade in or out of the market, is a difficult strategy for nearly all investors. A Barron’s article written in October of last year, The Timeless Allure of Stock-Market Timers , highlighted a few strategists’ ill-timed calls and their confusion on why it did not work. The worst part of market timing is the fact that the timing of getting out tends to occur near market bottoms and then getting back in the market near market tops. Making ill-conceived market moves can reduce the growth of one’s investments substantially. The below chart graphs the growth of the S&P 500 Index from 1990 through June 30, 2015. The blue line displays the growth of $10,000 that remains fully invested in the S&P 500 Index over the entire time period. The yellow line shows the same growth but excludes the top 10 return days over the 25-year period (6,300 trading days.) By missing the top 10 return days over the 25-year period, the end period value grows to only half the value of the blue line that represents remaining fully invested. Source: ICMA-RC Given the market’s recent pullback, the calls for getting out of stocks has picked up momentum. Until this most recent pullback, the S&P 500 Index had gone over 1,300 trading days without a 10+% correction. This extended run without a 10+% correction can be seen in the below chart. Source: Goldman Sachs For an investor, they should not get caught up in the market timing conundrum. These sell decisions often occur near equity market bottoms. Alternatively, an investor should stick with their asset allocation plan that incorporates their time horizon and risk tolerance. If the recent market pullback is jeopardizing one’s retirement as a consequence of the recent downward move in equities, they should reevaluate what an appropriate asset allocation should be. The investor’s asset allocation preferences should incorporate the time horizon for various buckets of assets. Shorter-term investments should not be invested in equities if accessing these funds will occur over the next several years. Timing the market may sound appealing, especially after a pullback like we are experiencing at the moment. Reducing equity exposure when the market has become increasingly volatile will certainly relieve some anxious feelings. If near-term access to investments necessitates reducing equity at the moment, be sure that is the case and equity exposure is not being reduced in an effort to simply time the market. The increased market volatility experienced over the last few months is certainly more typical of equity movements and is likely to continue in the near term. Share this article with a colleague

There Are No Holy Grails

When the markets get volatile, many strategies start performing poorly. Even your most basic diversified low fee indexing strategy will start to look weak, even though it likely beats most professional fund managers. And when these strategies start to weaken, many investors will start getting impatient. You probably know that nothing works 100% of the time, but that still doesn’t stop the allure of the green grass elsewhere. I know, the gold strategy looks so good in the short run. That fancy hedge fund strategy has outperformed since the S&P 500 (NYSEARCA: SPY ) peaked. That short-only fund looks really smart now. But the problem is that most of these fancy-sounding strategies are charging you high fees to underperform 80% of the time. And unfortunately, they lure in most of their assets during that 20% of the time when the markets look weak. But here’s the thing – there are no holy grails. Nothing works all the time. If you don’t hate something in your portfolio most of the time, then it probably means you’re not diversified. But be careful about the difference between being diversified and being diworsified. Diversification is best done when it’s simple, low-fee and tax-efficient. Diworsification occurs when you’re just layering on expensive and tax-inefficient strategies that provide far less benefit over the course of an entire market cycle than you think. And most importantly, find a good strategy and stick with it. You’ll be better off in the long run if you find a diversified, inexpensive, tax-efficient and systematic investing process, as opposed to constantly flipping in and out of strategies and searching for that holy grail that doesn’t exist. Share this article with a colleague

Stocks Higher 10 Years From Now

Before the onset of the market weakness in the early part of last week and the end of the prior week, S&P Dow Jones Indices released a report highlighting rolling 10-year annualized returns for the S&P 500 index. The report seems prompted by a response Warren Buffett made to a question on timing the market. Buffett noted he was not a market timer, and simply responded, “Stocks are going to be higher, and perhaps a lot higher, 10 years from now. I am not smart enough to pick times to get in and get out.” In the report, S&P notes: “Since 1947, the S&P 500’s price return was up in 72% of calendar years. Add in dividends reinvested and that batting average jumped to 80%.” “And if one is worried that the S&P 500 has gone too far since the conclusion of the 2007-09 mega-meltdown bear market, consider that the rolling 10-year CAGR through Q2 2015 was +7.9%, nearly 400 basis points below the long-term average.” “… there have been times when things didn’t work out too well for investors, but these times were few and isolated. Of the 278 quarters of rolling 10-year CAGRs from Q1 1946 through Q2 2015, only eight were negative, and they all occurred between Q4 2008 and Q3 2010.” (Source: S&P Dow Jones Indices ) The S&P report contains additional detail on sector returns going back to 1990 and investors should find the entire report a worthwhile read. One sector highlight noted in the report is the fact that, “… each sector recorded very high monthly 10-year CAGR batting averages, or frequencies of positive observations, from 100% for consumer staples, energy, materials and utilities, to 79% for telecom services and 67% for financials. The S&P 500’s average was 87%.” In short, timing the market can be a difficult endeavor for many investors. Last week’s heightened market volatility is an example of this, especially for those who sold out of stocks on Tuesday. Share this article with a colleague