Bide time in the ups and downs

Why changing your portfolio will only lead to pain Should I be changing my portfolio considering it’s a recession?

A new client at my financial planning firm asked me this week if the stock market was going to fall because of high inflation and global uncertainty.

He was concerned his portfolio would reduce in value, and wanted to take advantage of the possible opportunity to sell high and buy low.

Invariably, the question behind the question is: “Should I be doing something different with my portfolio?”

This is just another version of the market timing question dressed in different clothes. Should I sell stocks and wait for a more favourable outlook to buy them back?

More precisely, can we find clear trading rules that will tell us when to buy or hold stocks, when to sell, when to admit our mistakes, and so on?

The lure of successful trading strategies is seductive. If only we could find them, our portfolios would do so much better. Motivated by the substantial payoff associated with successful timing, researchers have examined a wide range of strategies based on analysis of earnings, dividends, interest rates, economic growth, investor sentiment, stock price patterns and so on.

The money management industry is highly competitive with more stock mutual funds and Exchange Traded Funds (ETFs) available than listed stocks.

If someone could develop a profitable timing strategy, we would expect to see some funds employing it with successful results.

But really, successful timing requires two correct decisions: when to reduce the allocation to stocks and when to increase it again.

Watching a portfolio shrink in value can be worrying, but investors seeking to avoid the pain by temporarily

Think of it like a bar of soap… the more you handle it, the less you have

shifting away from their longterm strategy may wind up trading one source of anguish for another. The initial upsurge in prices from their lows often takes many investors by surprise, and they find it hard to buy stocks that were available at lower prices just a few weeks earlier.

The opportunity cost can be substantial. Over a 20-year period ending in 2023, the world stock market – measured by the MSCI world index – would have returned on average of 10.12% and the American S&P 500 index would have returned 11.2%.

But during this period, missing the best 15 days would have shaved the return down to about 6.5% – an alarming reduction. Add to this the likelihood of increased transaction costs plus the potential tax consequences of a short-term trading strategy and the odds of adding value through market timing grow slimmer.

When the news headlines alert you that everyone is selling, remember that for every seller there is a buyer and the smart investors are the buyers from those who panic and sell.

As a thoughtful financial planner once observed: “A portfolio is like a bar of soap. The more you handle it, the less you have.”

Trust in the capital markets and remember that when you invest, time in the market is more important than timing the market.