We constantly tell people, "We don't time the markets." Nobody can do that with any consistency. Nobody. It's usually luck when someone gets it right. It is far more important to keep your diversified portfolio within your risk budget than to make bets on the next two months, the next two years, and so forth.
Violating your risk tolerance is a recipe for disaster, and you are usually most tempted to change your risk at the exact wrong time. This usually comes from "chasing" recent market returns and "avoiding" bad returns that have already happened. As humans, we are hardwired to do this, but it's horrible behavior as an investor. Buy low, sell high. Simple, not easy.
In the past 23 years of my career (yes, I really am that old), when our clients begin to throw in the towel and "get more conservative", the decline is nearing its end. Likewise, when conservative, moderate, rational people begin to demand higher risk by "getting more aggressive" the bull markets are nearing their end as well.
So it begins...
In the past month, we have started to hear the "I want to take more risk" version. This doesn't mean the markets are about to tank, or that the stock markets can't continue to rise for a bit. They certainly could. But these requests, at these valuations, give us pause. Before charging ahead to add risk to your portfolio, please consider some of the following charts.
It's your money, and you can do what you want. But our suggestion? Work with your advisor to keep your portfolio within your risk budget. If you don't already work with us, just send an email to firstname.lastname@example.org and request a link to discover your own risk budget.
Where is the stock market compared to its history?
This chart, found in Jill Mislinski's Advisor Perspective article from October 2, 2017 (click here) shows where the U.S. stock market trends have been since 1870. Would you say the stock market is "on sale?" Is this a perfect time to increase the risk on your investment portfolio?
What about a moderate portfolio? 60% stocks, 40% bonds?
Last week, Goldman Sachs reported that diversified accounts have not gone this long without a 10% decline since the 1929 stock market peak. CLICK HERE for the article. Looking at the graphic below, it's still difficult to make the case that domestically things are "on sale." Is this a good time to "add risk?" A good time to "get more aggressive?"
What should investors probably be doing?
The best practices? Stay disciplined to commonly accepted strategies that have proven to work over time.
- Know why you are investing. Your investments should be working to help you achieve specific planning goals. If you can't stick to an investment strategy for more than five years, something needs to change. Talk to your advisor if that's the case.
- Know your risk budget, and make sure your investments are aligned with that risk budget.
- Stay invested in your strategy rather than make bets. Gambling doesn't profit the gambler.
- Rebalance your portfolio if it gets outside your budget for risk. This discipline can help you trim when things are high while adding when things are low.
As always, please contact us directly if you need more individualized guidance. We are happy to help you make sure that you know the answers to these two important questions about your financial plans:
- Am I on track to meet all of my financial goals, regardless of what may happen in the news?
- What can I do, within my control, that may improve my financial situation?
Disclaimer: This article is for informational purposes only, and is not intended as individual investment or financial planning advice. For individual advice, seek assistance from your registered investment professional. Athena Private Wealth offers Investment Advice through Athena Advisor Services, LLC, A Registered Investment Advisor.