Some of you may remember the song “Spinning Wheel” by Blood, Sweat and Tears. There is a famous line in the song: “What goes up must come down.” Looking at the market for the month of August proves just that. August was tumultuous, to say the least. There were days when the markets were down by several hundred points and back up soon after. There is worry over a trade war with China, interest rates in Europe are at an all-time low and corporate growth is slowing down. As we prepare for the volatility that lies ahead, what should be your plan of action?
Wikipedia defines market timing as “a strategy of making buying and selling decision of financial assets (often stocks) by attempting to predict future market price movements. This prediction may be based on an outlook of market or economic conditions resulting from technical or fundamental analysis. This is an investment strategy based on the outlook for the aggregate market, rather than for a particular financial asset.” In an article by Paul A. Merriman entitled “Why Market Timing Does Not Work,” he lists several examples including:
Investors don’t like losing money. Yet you’ll do just that about half the time when you shadow a trend-following timing system.
Investors hate to be wrong and have it rubbed in their faces. But often a timing system can tell you to sell a fund at a certain price and then buy it back at a higher price. Even though this is normal, it makes timing seem insane — producing losses instead of preventing them.
Investors hate to make mistake after mistake. Yet a timing discipline requires them to keep buying and selling without knowing the outcome. The moment you override the system, there is no system left and the strategy has failed. You have no way to know when to jump on the bandwagon again except by following your emotions — and that is a notoriously poor way to time your investments.
Merriman makes a very solid case for why market timing is not your “best bet.”
Hire an active manager. If you have a passive strategy, when the market goes up 10% so will your account; however, when the market goes down 10%, your account will also. Having an active manager should allow you to take your hands off the steering wheel and let someone else drive — someone who knows the area. A good active manager will make sure that your account is diversified to help insulate you as much as possible from the hard times that may lie ahead. You don’t want to be making decisions on your own that may cripple your investment future.
Meet with your financial advisor to be sure your current asset allocation and level of risk is accurate for what volatility you can tolerate. Every person is different on what level of risk they can take before they cannot sleep at night. If you are retired and your investment accounts are a large supplement to your income, you may want to have a more conservative asset allocation. If you are just starting out and have a longer time horizon, you may be able to weather whatever storms come our way and take on more risk.
Last but not least: Don’t be constantly looking at your computer or your phone to see what your account has gained or lost. If you have hired the right manager, have the right asset allocation and level of risk, trust in the professionals and look for something to enjoy about every day.
The bottom line is this: Have an action plan to combat the volatility that lies ahead. You will not regret it.
Sources: Retirementors-Why Market Timing Does Not Work by Paul A. Merriman- October 23, 2013.
Victoria A. Hemiup is an assistant vice president, at Karpus Investment Management, a local independent, registered investment advisor managing assets for individuals, corporations, non-profits and trustees. Offices are located at 183 Sully’s Trail, Pittsford, NY 14534 (585-586-4680).
This Market Commentary is the opinion of Karpus as of the date written and is for informational purposes. While reasonable care has been taken to ensure that the information herein is factually correct, Karpus makes no representation or guarantee as to its accuracy or completeness. The information herein is subject to analysis of the market at the time of publication and is subject to change without notice. It should not be assumed that correlations based on our analysis of historical returns will persist in the future. This information is included for informational purposes only and reflects the opinion of Karpus. It should not be assumed that any security discussed will prove to be profitable or that the investment decisions we make in the future will be profitable or will equal the performance of any security discussed herein. This information should not be considered a recommendation to purchase or sell any particular security.