Part 7: Market Timing and Putting it all Together

  • July 12, 2017

    WatchPart 6 discussed four common types of investors whose strategies varied from betting on price trending, to betting on price reverting. This part tries to develop conclusions regarding these complex issues and which strategies might be appropriate.

    First, asset allocation is not simply about selecting a percentage of the portfolio to place in equities. It is about deciding between equities, bonds, alternative investments, cash, and personal investment opportunities such as college educations, personal real estate, life insurance policies and so forth. Further, each decision regarding an asset class like equities involves numerous other decisions. For example, equity allocations can be further allocated into subclasses such as domestic vs. international, growth vs. value, and so forth.

    Still further, a key issue touched upon in Part 1 is that whether markets trend or revert may change through time and clearly depends on the time horizon. I believe there are different tendencies towards trending over different time intervals such as quarterly, annually, and longer.

    All of which lead to the following three suggestions:

    1. Asset allocation should be primarily driven by financial circumstances, sophistication, experience, goals, and risk tolerance. Therefore, an investor’s equity allocation should be based on taking a suitable level of risk. Large changes to that allocation should be driven primarily by large changes in the investor’s circumstances and preferences, not in attempts to time markets. Market timing should generally not be used to make major long-term changes to allocations.

    2. Equity markets have demonstrated a tendency to trend over time periods of many months to perhaps a few years. Nevertheless, an investor’s overall risk and asset allocation (particularly the exposure to equity market risk) should be rebalanced periodically to keep risk levels within tolerable bands even though rebalancing increases the chances of missing some gains from upward trends and of investing additional funds during downward trends. A portfolio with a targeted 60% allocation to equities should be considered for rebalancing if the actual allocation exceeds perhaps 65% or falls under 55%.

    3. Most securities markets have demonstrated a tendency to revert over periods of several to many years when the asset class has experienced dramatic gains or losses. Investors may wish to consider strategies of modest reductions in target allocations for asset classes or sub-classes that have overperformed very substantially in the last 2-5 years, and modest increases in target allocations to those that have underperformed very substantially in the last 2-5 years.

    In all cases, temperance should prevail. Focus should never be allowed to stray too far from the general objective of keeping overall portfolio risk within a range that is appropriate for the investor in light of circumstances and preferences.

Leave a Reply

Your email address will not be published. Required fields are marked *

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>

Archive

Tags

1256 contracts, 2010, 401K, adp report, Advisors, Alexandra Twin, alternative investments, annuity, asset allocation, asset classes, asset management, Associated Press, away, banks, Barrons Top 100, BCA, BCA. Biltmore Capital, Ben Bernanke, Best Week, bias, Biltmore, Biltmore Capital, Biltmore Capital Advisors, bond market, Brand, Brand Recognition, Business, Call, CFP Princeton, changes in market price, Chief Investment Officer, closed end funds, CNBC, CNBC Halftime Report, CNN, CNN Money, CNNMoney, CNNMoney.com, collar stock, college grads, Consumer Confidence Report, correlations, Covered, Covered Call Options, credit ratings, customized investment strategies, Dean, donald chambers, Dow Jones, dr don chambers, drop, Early, easy trading, economic policy, economy, Edge, efficiency, election, end, equilibrium, equity trading, etf, etf trading, ETFs, euro, Europe, Europe debt, European debt crisis, family office approach, federal income tax, federal investment income tax, Financial, financial advisor, financial crises, financial distress, financial management, financial security, financial strategies, Ford, Fox, Fox Business, fund manager, futures contracts, Gains, General Motors, Global, global market, Global stocks, groupon, halftime report, Herbert Lash, high income tax, home country, Home Sales, housing market, IDEAS, income tax, income taxes, initial public offering, Instant View, investment bias, investment income, investment returns, investment risk, investment strategies, Investors, IPOs, IRA, Jilian Mincer, Jonathan Cheng, KANA INAGAKI, key, large losses, long risk exposure, Los Angeles Times, make money, making investment money, making money last, Manufacture, Manufacturing, Market, market news, market price, market volatility, Markets, marketwatch, MICHELE MAATOUK, Mike Miliard, Molly Vernon, money, Money Manager, money managers, money strategy, municipal bond interest, municipal bonds, nassau club, New Jersey Advisors, New York Times, NJ, NJ advisors, NJ financial advisors, NJ money manager, NJ wealth advisor, NJ Wealth Advisors, obamacare, oil slide, Options, options strategies, Outlook, outperformance, Pending, personal financial services, personal risk analysis, Play, portfolio manager, Potfolio Manager, Princeton, Princeton Advisors, Princeton asset management, princeton financial advisors, Princeton Money Managers, Princeton wealth advisor, private wealth management, rally, recession, Recognition, registered investment advisor, Registered Investment Advisory Firm, retirement, retirement strategy, return, returns, Reuters, reward, RIA, RIA Princeton, Risk, risk exposure, riskier, rmd, Roth IRA, safer, saving taxes, savings, SEC-registered, Seeking Alpha, short risk exposure, Shudder, signals, skype, social security, social security benefits rules, star ledger, state income tax, Stephen Bernard, Stock, stock market, stock market returns, stock market winners, stock option strategies, stock price, stock prices, stock research, stock strategy, Stock Volatility, Stocks, structured notes, Stuart Day School, swine flu, tail risk, Tax Advantaged Investments, tax free investments, tax savings, tax strategy, taxes, taxes for social security, taxes on investment income, The Dean, The Wall Street Journal, Thomson, Thomson Reuters, Tick, Tim Ralph, Timothy Ralph, Today, Tony Roth, Trading, tricks, Tyler, tyler vernon, U.S., U.S. dollar gains, U.S. Stock, unemployment, USA, USA Today, VIX, volatility, Wall Street, wealth management, wealth manager, wells fargo, world market, worth, Yahoo, Yahoo Financial,