Leave The Big Calls To The Pundits
Courtesy of Roger Nusbaum of Alpha Baskets
Barron’s had a bit of fun with the folly of trying to market time in terms of making big calls about the transition from bull to bear and back again. Included in there was the following quote from an advisor named Allan Roth:
“My clients pay me a lot of money so I can tell them that I don’t know the future. The more we try to time the market, the worse we do.”
This is something we have discussed many times over the years but of course it remains an important topic because of the behavioral nature of people to repeatedly make poor decisions at what turn out to be major turning points for markets.
If an investment lifetime is 40-50 years (accumulation through distribution) then you might expect to experience 6-9 bear markets along with several other near misses. It is not crazy to think that of the 6-9 bear markets you experience you might really nail one of them, but beyond that would be a difficult expectation. The article notes that Bob Brinker nailed the dotcom bubble but didn’t do as well with the financial crisis.
The typical advisor or do-it-yourselfer will not be called out on stock market television to make a huge call that the bear is “starting right now.” John Hussman frames the reality of this task very well with his approach of perpetually assessing out the markets’ current positives and negatives and then basing any actions on that assessment.
This is not to say that Hussman necessarily draws the correct conclusions from his assessment, as he has had very bad luck with ‘up capture’ in his funds, but the idea is sound, perhaps a little simpler than trying to make epic calls and more useful for clients.
For example, the market is less likely to cut in half after it has already cut in half – a point made repeatedly here during the financial crisis. On the other side of the trade, history tells us that 67 months (the duration of the current bull market) is longer than average but not unprecedented.
The answer is not to sell everything and head for the hills but instead to think about taking a little volatility out of the portfolio which could be done by rebalancing down some outperformers (we discussed this a few posts ago) or reducing exposure to more cyclical sectors, like if tech has grown to an overweight versus its weighting in your benchmark. It might make sense to cut back that overweight and increase cash or add to a more defensive sector that may not have kept up with your benchmark.
There are other indicators that I watch and maybe you have indicators of your own, as well as a process involving some sort of portfolio discipline to help manage your portfolio or client portfolios.
For anyone new, I pay attention to the S&P 500 in relation to its 200 day moving average, the slope of the yield curve (although this probably won’t be relevant for a while), the performance of small caps in relation to large caps (the action this year is a big check in the negative column) and other indicators that point to narrowing leadership, the duration of the bull market, the 2% rule and a few others.
To me the market is flashing yellow but has not started that slow sort of rollover that has come with other bear markets.
At a high level the flashing yellow would be a reason to shift to underweighting volatility as outlined above. File this in the category of taking action that tries to smooth out the ride over the course of the stock market cycle and if this appeals to you, then you’ve already thought about most of this so the important thing becomes sticking to it.
