Content provided by Grant Engelbart, CFA, CAIA, CLS Portfolio Manager
The market is always full of diverse opinions, and after the recent rally and multi-year bull market we’ve seen, now is no exception. Let’s look at an example. We all have friends who are a little bit crazy – let me introduce you to a couple of mine. Meet Timey McTimerson (“Timey”) and Chasey McChaserson (“Chasey”).
Timey gets very nervous when the market (as measured by the S&P 500) has a rolling one-year performance more than 20%. And so, when performance is high, he sells out for a month and reassesses his portfolio the next month. Chasey likes to see strong returns as a sign the market is heating up. He only invests when the rolling one-year performance is more than 10%. If it’s not, he sits on the sidelines. Now, these friends of mine might seem crazy at first glance . . . but are they really? It is very interesting the number of bulls and bears that come out of the woodwork after a large move in the market.
Chasey and Timey’s returns since 1990 are shown in the graphic below. Timey has more than quadrupled his money in 27 years, and Chasey has nearly six times what he started with. Scarily, both returns are roughly similar to those of the Morningstar Tactical Allocation category. However, an investor who sat in a value-focused index fund turned that dollar into almost $13 without lifting a finger (it’s worth mentioning that the S&P 500 would have returned $11.50). The point is: Timing strategies – even those much more complex than these – may work once or twice, but they hurt investors over the long run.
The value of financial advisors is huge to helping investors resist these temptations. It’s amazing how many individual investors only want to buy what has worked, or get nervous for reasons unknown. But we all can fall into this temptation, as overconfidence reigns supreme amongst financial professionals. Find the risk you are comfortable with and the approach that makes sense, and your goals will follow.
The “timing game” is, in fact, a fool’s one. Just ask my friends!