Should I Invest In The Stock Market Near A Record High?

A few days ago the Dow hit a record high, the S&P500 came very close to doing the same thing. With this feeling of record high, several of you have asked me if it is a bad time to invest. I feel compelled to express my position publicly about this.

Here is how I recommend the clients of Anselme Capital to invest their money:

1. Invest in a fully diversified way. The portfolios I use for my clients spread the capital over 10000 stocks in more than 35 countries. The allocation over various markets has been optimized over very long time trails. Why would you invest your capital in a way that will fluctuate more when you can invest in a way that will fluctuate less?
2. Do not time your entry or exit of the capital markets. I recommend that because there is no scientific evidence that timing markets works effectively. Lots of stories, but no scientific evidence.
3. Do not time your capital allocation over various markets. Again, timing a market does not work, that means that you can’t time your entry or choose which markets you should go in at any time. Bonds, U.S. real estate, International real estate, U.S. stocks, International stocks, Emerging market stocks… my allocation is passive, it doesn’t change over time. This allocation is simply tuned once a year on the basis of long term performance.
4. Always invest your capital with a volatility that fits the length of time you are investing for and fits your personal risk tolerance. Lower volatility for what will be divested soon, higher volatility for longer term investment. If you shift your volatility on the basis of how hot the U.S. markets are at the moment, you are timing market and that doesn’t work. I recommend you have your personal risk tolerance assessed by someone else. From my observations self assessment can be highly inaccurate.

These rules are simple and I make only one possible exception to them. When a client starts investing with Anselme Capital I may phase their entry into the capital markets over time so that the volatility they are exposed to increases progressively. I find that this approach, which statistically may cost the client some money, is a good way to increase their confidence in the investment process. That statistical loss is a good investment in building trust in the process.

So if you ask me: “Should I invest in the stock market now that it is near record high?”

I say:

1. Yes, but don’t just invest in the U.S., invest everywhere. Diversify.
2. Yes, but don’t try to guess what your allocation should be based on your current market feelings
3. Yes, but make sure you are in a lower volatility portfolio if you will need your money soon
4. If you are still scared to go in the market, commit now to a timetable of about a month or two over which you will progressively invest your capital completely.

If you are still convinced that you should wait for a market downturn to invest, remember that the time your capital spends out of the markets represents an opportunity cost, that invisible opportunity cost is what makes market timing inefficient in the long term.

Cheers

Marc Anselme

www.anselmecapital.com

On The Trail Up, my hat’s off to Mikaela Shiffrin, U.S. skier who in the last two months became Slalom World Champion, won the World Cup Slalom for the season and turned 18, a meteoric rise!!!! A market high you may say… Looking forward to see her grow in the coming Olympic season.

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Originally published at anselmecapitalblog.com on March 20, 2013.