“Should I sell my investments since the market has been so strong lately?”
I’ve been getting this question quite a bit in the last few weeks. The “market” has seen a pretty good jump (A.K.A. the Trump Bump) since the election in November. Understandably so, a strong upward move in the market tends to lead investors to question whether or not they should move to cash to better position themselves for the inevitable drop that is coming.
I completely understand this logic. In fact, part of me even agrees with it. If we were fortunate enough to be in the “market” while it jumped 10% in the last few months, why not sell out of our investments to lock in that gain, then simply re-establish our positions when the drop happens? My emotional side feels like this is a great idea, we’d be selling high and buying low. Thankfully, I also have an analytical side that helps keep my emotions in check. After all, emotions are like children. You don’t ever want to stuff them in the trunk, but you certainly don’t want them driving the car.
It has been proven time and time again that investors achieve lower returns than that obtained by the mutual fund they invested in1. How is this possible? Simple, the timing of cash flows. Generally speaking, investors don’t time their buys and sells perfectly, which leads to systematic under performance. When we try to time the market, we have to be right twice; once on the sell, and again on the buy. No one can consistently time the market, and thankfully, we don’t have to!
We can combat this reality by continually owning the mutual funds we buy and reducing the “strategic” buys and sells based on current market headlines. This sounds simple, but in reality is extremely difficult. Humans are emotional creatures, and that child keeps trying to jump into the driver’s seat!
A proper investment portfolio is one intentionally designed around your time frame, risk tolerance, and goals. Hopefully, before you ever put a single dollar into the market you had created a well thought-out strategy based on these factors. If you did, congratulations! Thankfully successful market timing isn’t on that list, so in the normal course of business you can let the market do what it does, systematically re-balance, and ignore the white noise of the day-to-day (or month-to-month) market movements. Whew! What a relief to not have your goals being contingent on consistently timing the market!
However, if you find yourself constantly battling these emotions in really strong or really weak markets, it could be a sign you need to re-address your overall allocation. You should feel comfortable with the amount of risk you’re taking. If you’re not, it could be that an allocation change is necessary. However, that still doesn’t mean you’re selling investments and moving to cash to avoid the next correction. You’re simply readjusting your risk level.
One last thought. We don’t have a single client that only owns the S&P500 or the Dow. When we look at financial headlines, they are almost always centered on these indexes. We create well diversified portfolios that only have a portion directly invested in these asset classes, so keep in mind that what the “market” is doing on any given day most likely isn’t what your portfolio is doing. Sure, the S&P and the Dow affect our portfolios, but thankfully not to the extent people often believe.
So, let’s turn our focus to maintaining our investment strategy based on our time frame, risk tolerance, and goals. And good riddance! Let’s keep that child we love so much safely buckled in the back seat!
These are the opinions of Dan Funderburk and not necessarily those of Cambridge, are for informational purposes only, and should not be construed or acted upon as individualized investment advice. Indices mentioned are unmanaged and cannot be invested into directly.
Past performance is no guarantee of future results.
Dan Funderburk is a Registered Representative offering securities through Cambridge Investment Research, Inc., a Broker/Dealer, Member FINRA/SIPC. Investment Advisor Representative, Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Legacy Wealth Management, LLC and Cambridge are not affiliated. Cambridge does not offer tax advice.
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