There is no one-size-fits-all answer, but tactical shifting might make sense
Wise investors alter their approaches as market cycles shift, from bull to bear to something in between. A consistent strategy might be far riskier than one that involves tactical shifts according to the season.
Take most 13-year-old boys, who love wearing shorts and T-shirts. They love this so much that they wear this attire all year-round, no matter how cold it is outside. Boys do this for two reasons:
- That is the style now.
- They are 13 and don’t know any better.
This is not unlike how a lot of individual investors behave. They follow a traditional asset allocation/buy and hold approach, regardless of what the market is doing. This, and any other strategy, works fine in a bull market, just like wearing shorts and a T-shirt is fine during the summer. But it gets you crushed in a down market.
Think about three different types of markets, each requiring its own investment strategy:
In bullish times, the market goes up in a mostly straight line. Even someone with a brain the size of a walnut could make 15% per year (apologies to any cavemen reading this, if you can read, that is).
The 1995-1999 tech-boom market is a great example, as was the most recent 11-year bull market. In these markets, just about anything you invested in worked very well. This is true with an asset allocation or a trend-following tactical strategy.
Examples of a bear market (a decline in the market) are 2000-2002, the 2008 housing bubble, and maybe 2020, during, and after the coronavirus pandemic. Any strategy that has you fully invested gets hurt in this type of market. Imagine your 13-year-old son wearing shorts in the dead of winter: he feels comfortable because everyone is doing it, but he is freezing. In this market, a better strategy might be to invest in cash and bonds.
Here, volatility is high, producing some returns but at a significant risk of falling into a slump.
Although a fully invested strategy in such a market could work out ok, is the risk worth it? That depends on your appetite for risk, of course.
It is like that 13-year-old boy wearing shorts in the fall: If he gets a warm day, he is fine; if he doesn’t, he gets really cold. Maybe a more tactical approach is the way to go in this market.
An excellent tactical strategy often trails a fully invested approach if the market is going up in the face of significant risk (albeit with much less volatility). But it can help protect you if the risky market turns bearish. With this strategy, you alter the mix of your assets based on their price performance. You favor asset classes trending upward, and unload those going down.
In simple terms, there are two tactical methods to consider:
- Relative strength, also called momentum, has you buying the strongest investment from a basket of two or more asset classes. That could be stocks and bonds, or U.S. shares and international ones.
- Counter trend analysis entails buying into short-term weakness and selling into short-term strength. Neither of these are market timing, which involves predictions. Market timing tries to get out at market tops and in at market bottoms. Tactical allocation only moves when a trend is clear.
Talk to your financial professional to see if incorporating some tactical investing makes sense for you.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial professional prior to investing.
Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments.
Past performance is no guarantee of future results.
Asset allocation does not ensure a profit or protect against a loss.
This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.
This article was prepared by AdviceIQ.
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