Should you make changes to your wealth management strategy based on current market conditions and predictions?
I received this question from a friend recently:
“I am getting very nervous with the current market. I feel like the record highs don't make any sense with the turmoil and uncertainty in politics, the pandemic and the economy. Does it make sense to adjust to a more conservative allocation for the first half of the year until some of the current events play out? I am thinking any upside to the market is limited while potential downside would be significant.”
Short Answer: Market timing is not a strategy for wealth management
You know the moral of the story with the tortoise and the hare: slow and steady wins the race. You could sprint and make some gains, given you have the endurance and resources to finish the marathon at that pace. Market timing is a difficult strategy for any one investor. It wreaks havoc on your psyche to be constantly questioning "in or out" with an ever changing market. Further, you won’t know if it was a successful or optimal strategy for many years.
So, does that mean you should ignore valuations, stick your head in your shell and keep your current allocation and pace? Quite possibly, yes. I’ve met great success with buy-and-hold accumulators that invest from paychecks each month, year over year. Steadily saving into a diversified portfolio over a long period of time is absolutely one ideal way to grow wealth.
Perhaps you have amassed a large portfolio and are now retired or close to it, living off of the wealth you steadily gained with your investment strategy. A 30% decline to your wealth in a short period of time is a scary prospect. What should you do? Get out of the market?
Short Answer: Buying in and out of the market is not strategy, it is guesswork
I never advocate selling your investments and exiting the market all together. Why? No one has a crystal ball. What if you sell now and the market continues to go up? How long can you hold steady, waiting for it to fall? What if it doesn’t fall in 2021? And keeps going up in 2022?
Or, perhaps the opposite holds true and the market crashes because the COVID vaccines don’t work, political unrest disrupts our society, or any number of other unforeseen events occur? When will you buy back in? Did it occur to you, in the midst of a developing pandemic, to buy stocks in March last year? When the unemployment rate soared to record heights, were you focused on your portfolio? It was difficult enough to stay-at-home, mask-up and not let the political turmoil overtake my social and emotional well-being. The point is: don’t play guessing games with your wealth management.
Short Answer: Defense is the best offense when it comes to wealth management strategy
Now is a great time to set up defenses within your portfolio. Hopefully you made some gains from the bull market in 2020. If you invest in a well diversified, index-fund portfolio then now is a great time to shore up your personal balance sheet. Take those gains and pay down some debt. Rebalance your holdings back to your normal allocation or even to a slightly less aggressive portfolio.
We are in the “sell high” phase of the old adage “buy low, sell high.” Enjoy some gains and get ready for the inevitable stumbles the market will make over the next few years.
Short Answer: Planning is the only strategy to guarantee success
“My portfolio is usually 80% stocks, 20% bonds - but I’m going to rebalance to 75% stocks and 25% bonds until there’s a 20% decline from an all-time high in the market. At that point I’ll rebalance back to 80/20.” That’s a plan that you can write down and follow.*
Don’t rely on your emotions to know when to buy and sell: make a plan. As we’ve all learned in this past year, our carefully built house of cards can fall at any time. When that happens, making decisions intellectually can be difficult. You feel like “sell” is the right move, when in actuality, according to your written plan, you should “buy.” Trust in your plan to keep you on track when the proverbial poop hits the fan.
Practice what you preach: Here’s what I’m doing
In the vein of “Don’t tell me, show me,” I am planning to be more defensive in my own wealth management strategy. Nothing drastic, just some tweaks to be ready. Here are a few of my priorities:
- Pay off some debt. I’m paying down my HELOC, which has a very low interest rate but still costs me more than the return on any cash in the bank!
- Rebalance my portfolio. I’m a pretty aggressive investor, so I am pulling back and changing my investment to 80% stocks / 20% bonds. Once I pay down some debt, my investments will be over 80% in stocks and therefore I need to sell some to rebalance.
- Watch the market and stick to my plan. If the market rises, I’ll continue to sell whatever gains the most. I’m very comfortable staying at 80/20 for a long time. If the market falls 20%, 30% or 40% from all-time highs, I will not only rebalance back to 80% equities but also up that to 85%, 90% or 95%. If the market falls drastically, I will also utilize my line-of-credit to fund any lifestyle needs, rather than hold cash in reserve for potential purchases.
So, what’s your plan for 2021?