Fear-mongering was at its finest in the early morning hours of Friday, June 24, 2016, as the British pound plummeted to a 30-year low and many media analysts implying that its FTSE 100 would follow suit. When it only closed down 3.15% (and our domestic markets closed down 3-4%), I quipped on Twitter, "some #Brexit collapse, I haven't been this disappointed in a sale since Prime Day!"
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| Why cap at 7%, I doubt I hear back |
In short, the markets fluctuate. The markets crash. The markets rebound. The markets will do what markets do, and no one can predict their movements 100% of the time with an degree of accuracy. In reality, a market increasing drastically in short bursts should be every bit as alarming as those that their decreases (albeit, less painful, so any warnings are often dismissed as buzzkillers).
Both the Motley Fool (no relation) and Vanguard warned their investors about the dangers of over-reacting in times of panic, and their points are perfectly valid. All professional long-term planning has already accounted for drastic declines and for sharp increases because, for the most part, they even out in the long run. Market timing is a difficult process and a foolish endeavor. One often touted benefit of reallocation is that it shifts money according to the markets, but its moves are small so there is no drastic change after drastic shifts in either direction.
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| Money.CNN.com after Brexit vote |
For the most part, I adhere to that philosophy. However, the little bit of market timing I will employ is when the markets have set new all-time high and retreated off that mark. Then, I start directing a higher portion of my contributions to a cash position. Keep in mind, the operative word there is "portion" because I continue contributing to both stocks and bonds during these times (because either could continue to increase overall), but the logic behind gaining a higher cash position after setting a new high in the stock market is to have liquid assets on hand to benefit when (if) stocks or just market sectors present a rare buying opportunity.
For example, people who have been putting all their money into the stock market since 2009 have been doing awfully well for themselves. By March 4, 2013, the Dow Jones Industrial Average set a new all-time high closing mark. But the gains continued for another couple years until May 19, 2015, at which point it had closed on its current all-time high of 18,300. Since that time, for a plethora of reasons that have created a single reality, the markets have not closed above that mark. However, it has not closed 17% below that mark either. Some say we are still in a bull market. Others say we are in a bear market. The correct label will depend on whether the Dow closes above that 18,300 mark before retreating 20% or not.
Either way, I am buying into the market as it increases while upping my cash position to hedge either direction the market will take. The logic being that if the markets will eventually have to pull back, but they may continue increasing significantly until then. Yet, to benefit from a market retreat, cash on hand is necessary to buy into the depleted assets. If my portfolio were 100% in stocks and the stock markets declined drastically, then obviously, I would want to buy more at the lower price. Unfortunately, my portfolio value would be decreasing at the same rate as the falling prices, so it becomes a moot point. My idealistic hope would be that I could pull money out at the peak and then reinvest it at a lower amount (ideally at the lowest point of the valley). That's an ideal "buy low, sell high" scenario. Unfortunately, any given weekday, the market could move higher than it was the day before (in which case, I may have sold my shares for a lower price, and now I would have to buy them back at a higher amount).
This is the face of uncertainty. Once there is 100% certainty in the markets, then invest 100% into the asset classes that favor that direction.
