Avoiding the Issue of Timing
Should we simply not try to spot the bottom, even at exciting times like these? For anyone who isn’t a professional investor, and doesn’t have time to monitor the markets daily, the standard advice is to eschew timing, and avoid the temptation to act for the sake of acting. Here’s how the most popular ideas have worked this year:
Buy and Hold/ Stocks for the Long Run
Just loading up on equities and staying with them, on the philosophy that the long term is your friend, does have a lot to recommend it. So far this year, it would have lost 1.5%.
Dollar-Cost Averaging
You can try to reduce the risk of timing further, at the expense of reducing your exposure to the very long term, by putting in a regular amount each quarter or month. If saving out of income, most of us have to do this out of necessity. A policy of putting equal amounts into the S&P 500 each quarter would so far this year have turned $100 into $111.04.
Asset Allocation: 60/40
For most of us, being long equities without anything to balance them is too risky. You might have to retire, or lose your job, just as the stock market is low. So the most popular traditional alternative is 60/40, with 40% in bonds. Professionally branded “60/40” funds have gained a little over 1% for the year. Making the aggressive assumption that you put all of that bond allocation into long Treasuries, $100 would now be $105.94.
60/40 With Rebalancing
The most popular form of market timing is to rebalance a portfolio at regular intervals to revert to the asset allocation with which it started. This means selling some of what has risen and buying some of what has fallen. A 60/40 S&P/Long Treasuries approach that rebalanced at the beginning of the second quarter would have turned $100 into $108.30 — a fine return over five months.
Timing to Perfection
Selling short the S&P 500 to start the year, and then switching and going long at the low would have turned $100 into $198.17. This is why so many people try to time the market.
So, a mechanized asset allocation program with regular rebalancing would have fared well. As a growing proportion of savers are deploying their money through some version of this approach, as part of the default option for defined contribution pension plans, this is good news. Boring asset allocation would have handled this bizarre year quite well. And for those prepared to be more active, you don’t have to move all your money at once; you could have fed just some of your savings into stocks on the morning of March 24.
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