Staying the Course in a Varying Market

March 01, 2018
By Patrick V. Masso, CFA

“Those who live by the crystal ball are destined to eat broken glass.”

Timing the upward and downward motions of broad financial markets is notoriously difficult. Effectively timing markets requires being right twice – when to get out and when to get back in. Buying low and selling high seems like a straightforward concept, but how low is low enough and how high is too high? In practice, nobody rings a bell at the high or low.

The risk of selling “too early” or buying “too late” should be considered as an opportunity cost against the ability to correctly (and consistently!) time financial markets. Take the chart below from JPMorgan…

Missing only the ten best days of equity market performance nearly cuts returns in half as compared to those choosing to stay invested. Missing the best 30 days results in a negative return! Note the period covered incorporates the dot-com bubble at the turn of the century and the 2008 global financial crisis.

Each investor is operating under a different set of circumstances – account values, tax situations, and goals, to name a few. Before investing, it is imperative to understand the purpose of the money, risk tolerance, and time horizon over which funds can be invested. Once those parameters (and others) are established, it is possible to begin discussing a strategic asset allocation.

A strategic asset allocation can be thought of as the general level of exposure to broad asset classes like cash, bonds, stocks, and alternative investments. Establishing an appropriate strategic allocation aims to achieve the outlined objectives, while minimizing risk in the process.

Adhering to a strategic allocation is simple when markets are galloping higher. Emotions tend to set in, however, when times get rough and volatility to the downside increases. It is this precise time when staying the course is most important.

One way to stay the course is to understand the inherent risk of a strategic asset allocation before getting invested. The chart below shows the range of outcomes for seven model portfolios with differing degrees of risk and return over a 12-month time horizon.

Do you know where your portfolio stands? Are you comfortable with the probable range of outcomes? If so, stay the course!


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Legal, Investment and Tax Notice: This information is not intended to be and should not be treated as legal advice or tax advice. Readers should under no circumstances rely upon this information as a substitute for their own research or for obtaining specific legal or tax advice from their own counsel.