|Portfolio strategy for a quiet market
Thursday August 07, 2014
Stock markets have risen steadily over the past year, with
no major corrections along the way. The end of July saw a broad
market decline, but less than the 10% drop that would qualify
as a “correction.” In general, markets have been unusually placid.
The question is, have they been too quiet? The answer depends
on how you’ve allocated assets in your current portfolio.
If you are holding, say, over 70% equities in your portfolio,
and especially if you are over 50 years old, you should look
at tapering down the equity allocation, crystallize some profits,
and increase weighting in the balanced or fixed-income portion.
Those investors with no defined benefit (DB) pension plan should
be even more careful, because your fallback plan is to retire
later or work longer if your portfolio isn’t sufficient to meet
your income needs come your hoped-for retirement date. That
decision isn’t always in our hands, because employers like to
downsize and replace older, more expensive workers with younger
(cheaper) faces. This is very important in regard to safeguarding
assets built up over 20 years or more.
Late-cycle investing risks
People thinking about investing larger lump sums have to be
very careful when the markets have had a few good years, because
risk may increase the as a bull market ages.
When the markets have gone through a 40% correction, most (if
not all) of the risk has been removed, leaving potential investors
in a very favourable position. If that’s the case, why don’t
we see money inflows rise sharply after these corrections? The
reason is that after a correction, retail investors are still
afraid of a further drop. When people are fearful, they put
their head in their shell and run to “safe” but low-yielding
assets like money market funds or GICs.
This doesn’t mean you should give up on equities as part of
your investment portfolio in good times. It just means you should
not be overly aggressive based on strong past performance, thinking
it will continue. It might…and it might not.
Stock markets will always rise and fall, but they advance more
often than they retreat. We know this from over a century of
market history. What we don’t know is when they will rise or
fall, to what extent, or for how long. These are, of course,
all huge pieces of the puzzle, which is why, for most average
investors, a balanced portfolio works best, with assets allocated
in line with your risk tolerance and age. For example, as I
said earlier, if you’re over 50 years old, at this stage of
the market cycle, you probably wouldn’t want a portfolio weighted
70% to equities and 30% to fixed-income and cash.
What I’m saying is to tread carefully as you navigate the future
with so many unknown variables in play. Don’t be too aggressive,
because the timing just isn’t right any longer. It’s better
to give up a modest 5% to 10% in performance than to suffer
a steep 35% loss a couple of months after you’ve committed heavily
to equities at what may turn out to be the very top of the bull
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Personal Opinions & Recommendations Disclaimer
The foregoing is for general information purposes only and
is the opinion of the writer. This information is not intended
to provide specific personalized advice including, without limitation,
investment, financial, legal, accounting or tax advice. However,
please call the author to discuss your particular circumstances.