‘It’s about time in the market not timing the market’ goes the golden rule of investing. Dalbar’s research found that over the past 20 years, investors in equity funds have lagged the S&P 500 benchmark by an average of 4,66% per year. Trying to time the markets is a key destroyer of wealth creation.
So as many stock markets around the world reach record highs, the herd instinct will encourage many to pile in as things are just so good. Others may start to panic as markets become more volatile and they fear losses. There will also be the prophets of doom predicting ‘crashes’ and ‘bubbles’. And at some point, they will be right. And yes, markets will come down for periods.
Ben Carlson, a director of Ritholtz Wealth Management, notes that ‘the S&P 500 Index has recorded more than 150 new all-time highs since eclipsing its previous peak in late March of 2013. In 2017 alone, there have already been 30 new record highs. To put this into perspective, there were only 13 new highs for the entire decade of the 2000s. One of these peaks will be the peak, but predicting that ahead of time is not easy.’
He suggests seven strategies to invest at market ‘peaks’:
Rebalance: Your asset class weightings may be out of kilter as especially equities may now be overweight, so rebalance your portfolio to achieve your desired portfolio allocations.
Over-rebalance: Consider investing more in stocks or markets that may be undervalued.
Avoid complexity: Consider taking less risk by investing in more cash or bonds but be cautious of overly sophisticated hedging instruments if you don’t understand them. ‘Someone is going to be a hero coming out of the next market downturn, but figuring out who that will be is like playing the lottery.’
Have enough cash to make it through a rainy year or three: Have a buffer to ride the markets out and even take advantage of a downturn.
Dollar cost averaging: This provides a level of psychological comfort and while at possibly some cost, the insurance may be worth it. Regular contributions over a long period will smooth out the peaks and troughs.
Buy and hold: To paraphrase Winston Churchill, buy and hold is the worst investment strategy, except for all the others. It may be a more emotional ride, but look at the research.
Embrace the momentum: This is more complex and requires a rules-based framework to avoid emotion but can take advantage of trends.
Carlson concludes that while none may be perfect, pick the one that works for you from a psychological standpoint and stick to it.
WHAT TO CONSIDER
- Avoid the herd instinct and doomsday calls.
- Take out the emotion.
- Stick to your planning framework and objectives. Make sure the investment portfolios are still aligned to these
- Don’t try timing the market, but consider managing the risk with appropriate strategies.
- Leave it to the experts.
And as, Dan Wiener of Vanguard, suggests, ‘If you aren’t invested or are currently invested but have some new money on hand, I recommend that you put that money to work. If you are already invested and have a long-term strategy working for you, stick with it.’
Mike Lledo CA(SA) is an Associate of Citadel Investment Services