Christine Benz, the personal finance expert at Morningstar, has an excellent article about the four investment rules to ignore. These “rules” are in wide practice throughout the industry, but they don’t hold up under close inspection. In fact, they will destroy your long-term returns if you let them.
1. Consistency of returns is important in investment selection.
2. If an investment has been a laggard over the past three or five years, cut it loose.
3. Your risk tolerance should determine your asset allocation.
4. It’s ok to go to cash when you are nervous about the market.
This article is a must-read.
Kinda have a problem with her point #4. I agree that trying to time the market is futile at best. But moving money AWAY from the market when high risk prevails and moving INTO the market when that risk subsides is not really market timing. Will we be out at the top? NO! Will we be in at the bottom? NO! I acknowledge that historically 2/3 of the time the market rises, so moving 100% to cash may not be a prudent move, but sometimes on a relative strength basis MNYMKT is the strongest place to be. Afterall does not a majority of the risk come the market/sector, not the individual stock/etf?
I believe alot of the info (buy/hold) out there is based on what works in a secular bull market (i.e ’82-’00) and those strategies may not work well in a secular bear. Buy/Hold may not even be the best strategy in a secular bull. My research says that missing the BEST days also many times meant we missed the WORST days.
I don’t think Christine Benz is addressing going to cash as part of a systematic tactical strategy. I think she is addressing the “emotional asset allocation” issue that we have talked so much about on this blog-moving to cash when you “feel nervous.” That’s how most clients do it, and that’s a lot different that using cash strategically as part of a plan. Changing your allocation based on how you are feeling at the moment is a recipe for disaster.
Absolute recipe for disaster!! I will catch up on some previous posts. Keep up with strong work!
NW