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 as 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. Instead of attempting to predict or time the markets, enter them with confidence and then rebalance your portfolio as necessary to deal with what comes next, including any potential corrections.
With the DOW spending time above 17k three times in recent months, and with now two pullbacks into 16k+ territory, more and more participants have ever-increasing expectations that a pullback of even larger proportions is imminent. Of course, others are anticipating another outright crash but that’s already made the rounds plenty of times since last year. 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 the market corrections for the foreseeable future and if will you be missing the DOW 20k+ 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 just no way to know. Nor is there any way to predict the full market impact of high-frequency trading/quant funds, midterm elections and a Republican sweep, or Russian, Israeli, Egyptian, Chinese, 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. The Fed especially seems to have been rattling the markets lately but good luck getting anything concrete and actionable out of them. They specialize in vague. We know now they have ceased their bond purchasing programs, and that’s about 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 forsaw 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 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 that’s a “No”. Well, neither am I. 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, causing economic contractions? Neither do they. 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 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 property, commodities, or Series I savings bonds – and then be sure to maintain the balance of that existing portfolio as you add new investment vehicles or more money into each bucket. And then, again, rebalance as needed. That’s it.
Of course, depending on what 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 is to do nothing. Sit on the cash or take a trip instead. Otherwise, realize that rebalancing is the key to how you enter the markets with confidence, without thinking twice. 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 and allocation percentages before you invest anything, then stick to them over time (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 think and fare better than you otherwise might.