My father-law-in asked me to join him on a fly-in fishing trip to Ontario, Canada. When we got to camp, I put together my fishing rod but was having some problems with the reel. Instead of reeling in the fishing line, the reel was letting line out. In an effort to fix the reel, I cast the line into the water and ended up catching a 40-inch Northern Pike, even though the fishing rod wasn't working correctly. The point of this story isn't to brag, okay maybe just a little, but to let you know that if my line wasn't in the water, I didn't have the opportunity to catch the fish.
This concept carries over to the equity markets. An investor can’t wait for perfect market conditions to catch market rallies. After the 2016 election, many people’s immediate reaction was to pull their money out of the market, and if you did you missed a 7% end of year rally. In 2017, if you thought North Korea would crash the markets and sold, you missed another 11% rally. The point is that markets move up and down, and no one can guarantee the timing or conditions that will trigger these swings.
What can an investor do to combat the temptation for market timing?
- Maintain an appropriate asset allocation of your investment accounts. The percentage of stocks and bonds in your portfolio should match your risk tolerance and time horizon.
- Rebalance your accounts at least annually. Rebalancing helps manage the risk in your portfolio by selling the assets that have gained a lot and adding to the investments that might have more attractive prices.
- Update your asset allocation as your life and time horizon changes, and not based on what is going on in the world.
- Trust your financial plan, and remember to keep a long-term perspective. If you don’t have a plan, consult a professional and get one!
In summary, if you are waiting for perfect conditions, you might miss a big one. If you want to talk about your investments and asset allocation, please let me know, and I'd be happy to set up a time to review your accounts.
Thanks for reading, and check out my fish below.
Chad Duppong, ChFC®, CLU®, CFP®