You Can’t Keep A Good Asset Down!

Bill Parrott |

Investors wrenched $227 billion from equity mutual funds from July 2015 to January 2016 before the Dow Jones Industrial Average climbed 54%.  In January 2018 investors poured $39 billion into equity mutual funds before the Dow Jones fell 12.25%[1]

This behavior isn’t limited to the market as investors move money in and out of sectors based on their emotional barometer.  Through September 2017, individuals added $115 billion to funds in the intermediate-term bond sector, at the peak. Since then, it has fallen 7%.  At the same time, they withdrew $69 billion from US large-cap growth funds before this sector rose 20%.[2]

I understand wanting to be invested during the good times, and out at the bad times but timing the market is a waste of time and it can’t be done. Greed and fear drives short term trading, and this usually doesn’t end well for investors.

Since World War II, there have been seven bear markets defined as a drop of 20% or more. The average pullback has been 34.5%, lasting 14 months and a recovery time of 26 months. However, the average expansion lasted 83 months or six times as long as the typical correction. The average total return during the expansion phase was 268%![3]

It’s clear from the data that it makes little sense to time the market. Investors who try probably lose more money than if they stayed fully invested through a correction.

Here are several ways to protect yourself from trading on emotion.

1.       A diversified portfolio of low-cost mutual funds will allow you to participate in all markets -domestic and foreign. It will also give you access to several asset classes like stocks, bonds and cash. It won’t guarantee a positive return during a bear market, but it will help cushion the blow. For example, when the stock market fell 37% in 2008, long-term bonds rose 25.9%.[4]

2.       Rebalancing your portfolio annually will keep your asset allocation and risk tolerance intact. When you rebalance your portfolio, the model will sell assets that are richly valued, and buy those that are undervalued. The best time to rebalance is in January after all your dividends, interest payments, and capital gains from the previous year have been credited to your account.

3.       If you’re concerned about a stock market correction, keep two to three years’ worth of expenses in cash.  If your annual expenses are $50,000, then a cash balance of $100,000 to $150,000 is recommended.  As a reminder, the average bear market has lasted 14 months so your cash balance will allow you access to your money during a correction while waiting for your other investments to recover.

4.       A financial plan will align your financial goals to your investment portfolio. If your plan, portfolio, and risk tolerance are in sync, then you’re more likely to stay invested for the long-term.

5.       Work with a Certified Financial Planner™ who is a registered investment advisor. Working with a trusted professional will give you peace of mind because they’ll be intimately aware of your personal and financial situation. During times of market duress, it helps to have a confidant you can call and discuss the issues of the day. Furthermore, a study by Vanguard found that an advisor relationship can add +3% in net returns.[5]

Markets have been gyrating for centuries and the next few hundred years won’t be any different so don’t let short-term moves derail your long-term goals. Rather than worrying about the direction of the market allocate more of your time to refining your goals, it will bear more fruit.

A good hockey player plays where the puck is. A great hockey player plays where the puck is going to be. Wayne Gretzky

June 12, 2018

Bill Parrott is the President and CEO of Parrott Wealth Management firm located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process.

Note: Investments are not guaranteed and do involve risk. Your returns may differ than those posted in this blog.


[2] Morningstar Direct℠ Asset Flows Commentary: United States. 10/13/2017, Alina Lamy, Senior Analyst, Quantitative Research

[3] Morningstar® Markets Observer, Q4 2017, Data as of 9/30/2017, Morningstar Research Team.

[4] Dimensional Matrix Book 2018