To many, the markets look expensive right now. If you’ve done a thorough job understanding and describing your investment objectives and your capacity to invest and bear risk — and you have money at the ready — you might be sitting on the sidelines wondering what to do right about now, especially when the markets see-saw.
How to make a market entry? Do you wait for a big correction before you purchase anything or do you plow forward? It’s natural to feel hesitant. Nobody enjoys buying into something only to see it decrease in value in short order. It’s a sure way to feel like a sucker.
Then again, if you wait for the markets to go down and they don’t, you’ve just shot yourself in the foot and missed out on returns. In fact, when I first published on this topic almost four years ago, the DOW was vacillating between 16–18k and it made many onlookers rather jumpy. The rest is history.
Hence, here’s a humble suggestion for your consumption: Instead of attempting to predict or time the markets, enter them with confidence knowing that you can rebalance your portfolio with cold calculation as necessary to deal with what comes next, including any potential corrections.
With the DOW having eclipsed 26.5k only to pull back to just over 23.5k this year and then edge its way back up now to over 25.5k, some participants have ever-increasing expectations that a pullback of even larger proportions is imminent. Of course, others are anticipating another outright crash, but that kind of stuff is always making the rounds. Besides, there are plenty of reasons to tune that kind of drivel out, even if a crash were indeed to come to pass, as I have previously written about here.
However, you may still be asking yourself whether we’ve seen all the market corrections for the foreseeable future and if you’ll be missing the DOW 30k+ boat if you don’t invest right now. Or, is the market see-saw action a sign that there’s a bigger retracement on the way?
There’s simply no way to know. Nor is there any way to foresee the full market impact of high-frequency trading/quant funds; midterm elections; the “Mueller Investigation”; trade wars; Chinese, Turkish, Iranian, or any other country’s politics; nor is it possible to exactly forecast the Fed’s next moves and resulting market-participant reactions; nor will any big-time market players reveal their hands. There are thousands of factors to take into consideration at any given moment and the way they all interact to influence market activity can be difficult to decipher, to say the least.
Trade wars especially seem to have rattled the markets lately, but good luck anticipating anything concrete and actionable on that front from the current US presidential administration. It specializes in WTF. We know that “Trump is taking aim at China”, and that’s about the extent of it.
Beyond the “what” and “why”, even more importantly there’s the “when” that’s basically impossible to foretell. We can argue that certain things are due to unfold in a specific way, but at what future point in time, exactly? It is known that some market participants foresaw problems of epic proportions born out of the securitizing of mortgage debt in the early 2000s, but nobody could have said at the time that the peak prior to the market bottom of March 6th, 2009, would be reached on October 5th, 2007. Nobody at the time could have given you a precise date on either end, in fact.
In other words, nobody back then could have timed the market exactly. Billionaire investors and extremely well-connected business professionals lost their shirts and their careers in spite of their experience, education, and connections. It has not only been shown with statistical significance that most people fail most of the time at timing the markets, but there are plenty of personal anecdotes besides to reinforce those statistics.
It was extremely hard to time the markets inexactly, even. President Obama and the Oracle of Omaha made public statements about the stock markets basically looking cheap soon before the bottom that March, but they were statements, not guarantees, and they bore no date predictions. Many people continued to steer clear.
So why are you trying to predict or time the markets now? Is it a desire to gamble a bit? Are you a clairvoyant? Are you a member of the Plunge Protection Team? I’m guessing the answers to all those questions can be summarized with a single nope. Truth is, I’d have to answer in the same manner.
Do you even have time to monitor and digest every last bit of minutiae that could be of relevance to active trading and market timing success? Neither do I. Do you know when the Fed will get really concerned about the economy overheating and begin raising interest rates in even more earnest, causing economic contractions? Neither do they, entirely. Do you possess insider information that nobody else does about the fate of the world? No?
A little secret for you: Nobody does.
The most reasonable way forward, then, is to create and invest in a well-rounded portfolio (think lazy portfolio comprised of the most broad-based low-fee index funds out there) and then rebalance as needed. If you are adding to an existing portfolio, remember to take into consideration all your investments — including anything aside from stocks and bonds such as real estate, commodities, or Series I savings bonds — and then be sure to maintain the different allocation percentages of that existing portfolio as you add new investment vehicles or more money into each bucket. And then, again, rebalance as the situation demands.
That’s it. Seriously.
What’s yet more interesting is the fact that compared with somebody else who has already been invested in a lazy portfolio for a little while, especially someone with an investment time horizon equal to yours (10, 20, 30 years), there is no difference in how the two of you would approach the future once you ponied up and became invested yourself: Each of you would be rebalancing where necessary to deal with the ups and downs from this day forward until you’ve each seen your portfolios through to their retirement and (likely) accomplished your investment objectives. The sole distinction between the two of you is that you’re new here while the other person has already begun their financial journey.
Of course, depending on what assets you already hold; your time horizon; your personal goals; your true risk profile; and the amount of cash you have at your disposal currently; you may find that the answer at this moment is to do nothing in the markets; sit on the cash or take a trip instead.
Otherwise, realize that rebalancing is the key to how you enter the markets with confidence and cold calculation on your side, without thinking twice, without getting emotionally carried away. Set aside the notion that you can enter the markets at the bottom and exit them at the top. It’s a fool’s game. Tops and bottoms are arbitrary points in time anyway and are biased as they are dependent upon your period of analysis and choice of perspective.
Understand your investment objectives, true risk profile, and portfolio allocation percentages before you invest anything, and then stick to them (until circumstances in your life dictate that adjustments be made). That’s the wise and pragmatic thing to do. Over time, you’ll do better than you realize and fare better than you might have otherwise.