At the beginning of the year, the news reports started piling in: the stock markets were overvalued. P/E ratios were at highs not seen in years. Some people even used the curious phrase “melt-up” (which, correct me if I’m wrong, is kind of an odd thing for something that is melting to do).
I watched all this, and it brought to mind my continual nagging feeling like I really need to revisit my asset allocations in my investments.
I’ve written before about my ambivalence about rebalancing a portfolio. With a long timeline, and the long term potential for overweighting of stocks and equities (being more risky but more rewardy, if you know what I mean), this doesn’t seem like a problem, at least until you’re getting within the event horizon of retirement.
But with every market indicator referencing a market peak, I looked at a particular investment that I had wanted to adjust for a while. It was weighted pretty aggressively. Wouldn’t now be a good time to dial it back to a lower risk, lower return product?
Feel free to yell it out: No!
I believe dodged a bullet there. Can you see why?
See what’s become of me?
The problem was, in short, was that I was trying to time the market.
Timing the market means that you react to what the market is doing in order to better take advantage of gains or better prevent losses.
And it pretty much never works.
Why? Because a) we have no idea what the market is going to do over the short term, and b) what the market does is the only real signal we have about the market is going to do, and by the time we get that signal, it’s usually too late.
If you are able to profit on market timing, it’s usually a fluke. Over time, you will not be that lucky.
Warren wins again
Don’t believe me? Warren Buffett, wily fellow that he is, made a bet on this sort of thing. He bet $1 million back in 2007 that an index fund (of the kind promoted by Vanguard) would perform better than a selected bunch of hedge funds over ten years. (Someone actually took him up on the offer.)
At the end of 2017, he was able to claim victory. And it wasn’t even close. The index fund returned an average of 7.1% annually, while the hedge funds collectively returned an average of 2.2% annually
Now this is only one example, but you can find lots of them.
Getting back in again
Let’s say that I did get out of the high-risk products just in time before a major market crash. I would have been saved most of the losses that most expert generally believe is coming, and that would have been great.
Or would it have been so great? Because then there’s the question of getting back into higher-risk (higher-reward) products. Because you would need to time when you reinvest too., and chances are, you’ll miss the right timing there too.
The point is that you cannot predict in the short term what the market is going to do, so it would be folly to try.
Just stand still
The good news is that you don’t have to time the market. The better option in this case is actually stasis. Do nothing now. Continue on as normal.
Things will go up. Things will go down. This is all expected. This is all normal.
Now is a great time to stop thinking about the gyrations of the market. Keep adding to your balances as you ordinarily would, even if the stock market take a huge nosedive. As the market tanks, you’ll get a better value for your money anyway.
That’s what I’m going to do, though I’ll admit it was a close call these. Even I’m not immune to the emotion of these situations.
Have you read my Disclosure policy recently? Just checking. Please don’t take any of this as financial advice. Thanks
Latest posts by Mike Pumphrey (see all)
- What’s wrong with an interest-free loan to the government? - February 22, 2018
- Is it possible to pay in advance exactly the amount of tax you owe? - February 19, 2018
- Why everything is like a regressive tax - February 15, 2018