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Ben Carlson: How Many Will Stay The Course During The Next Bear Market?
FYI: Markets always seem easy when looking through the rearview mirror because knowing what already happened makes us all feel that everything in the past was blatantly obvious. It makes us feel that we would perfectly navigate those markets if only we had the chance to invest in the same scenario again. Regards, Ted http://awealthofcommonsense.com/2017/05/how-many-will-stay-the-course-during-the-next-bear-market/
Staying invested when the market is in a decline is not an easy dichotomous yes/no decision. A full continuous set of exposure options is available. It is often exercised because of the uncertainty of the depth of decline. The decision that the decline is a meaningful Bear market is hard to identify before much of the decline is already registered.
Market timing is a challenging task that most investors do poorly.
Some folks, who are not oversensititive to minor perturbations, will make minor portfolio adjustments that reflect their perceived odds of a real Bear market. I make such partial adjustments. Consequently I always suffer a loss in a Bear, but typically not as much as the market itself experiences. That's not a perfect strategy, but it is a practical one. Market timing is impossible.
Only a small handful of guys can accurately forecast a coming Bear, and that tiny handful is not constant over time. These guys tend to forecast more Bears than actually occur. However, they are very loud and very positive when announcing their negative projection (without revealing their damaged record).
These pervasive projections cause an overreaction by the general investing population. To avoid that overreaction, simply not listen. My approach is to only watch the market news channels on an infrequent basis. That works for me.
MJG, when you say "I make such partial adjustments." isn't that market timing? And when you say "Consequently I always suffer a loss in a Bear, but typically not as much as the market itself experiences." doesn't that show that market timing works, rather than "Market timing is impossible."?
MJG may be like the permabears he describes. If one hits all the bears and many bulls as well, one will cut one's losses during market slides as he described. That doesn't mean one can time the market.
Taken to the extreme, just keep most of your portfolio out of the market. You'll "suffer a loss in a Bear, but typically not as much as the market itself experiences."
Unless you get back into the market at the right time, your "round trip" (through the bear and the subsequent bull market) can underperform simple buy-and-hold. Though by cutting one's losses (and gains) one may sleep better.
Then there are the bull markets one may hit inadvertently. Lightening up through those create sure losses relative to buy-and-hold, no matter how fast one reenters the market. How many people have tried timing the bond market for years, going shorter and shorter on duration as long bonds have continued to do well?
I can see where my lazy submittal caused some confusion. I was not precise enough.
I did not mention time scale which is a critical distinction in market timing. I am not a buy and hold forever investor. I am also not a day trader. I do marginally adjust my portfolio one or two times a year based on my perception of market conditions. I do not define these adjustments as market timing decisions; they are based on very global conditions and my own assessment of them.
I make a point to ignore the hyperbolic shouting and excitement that makes up much of the business news. I make an effort to isolate myself from their many false assessments that can induce overreactions.
My adjustments, when I infrequently make them, are always on a modest scale, like going from 60% to 50% equity positions. Uncertainty in market direction always limits the magnitude of my infrequent trading.
I hope this helps. Taken over a long enough time scale, everyone is a trader.
ADDED THOUGHT: We all react to data, some more quickly than others.
Jokes aside, we simply can't be like deers caught in headlight. It is not too hard to get out. My 401 did NOT get decimated twice by 50% only because I got out. It is not about getting out at top and getting back in at the bottom.
Comments
Staying invested when the market is in a decline is not an easy dichotomous yes/no decision. A full continuous set of exposure options is available. It is often exercised because of the uncertainty of the depth of decline. The decision that the decline is a meaningful Bear market is hard to identify before much of the decline is already registered.
Market timing is a challenging task that most investors do poorly.
Some folks, who are not oversensititive to minor perturbations, will make minor portfolio adjustments that reflect their perceived odds of a real Bear market. I make such partial adjustments. Consequently I always suffer a loss in a Bear, but typically not as much as the market itself experiences. That's not a perfect strategy, but it is a practical one. Market timing is impossible.
Only a small handful of guys can accurately forecast a coming Bear, and that tiny handful is not constant over time. These guys tend to forecast more Bears than actually occur. However, they are very loud and very positive when announcing their negative projection (without revealing their damaged record).
These pervasive projections cause an overreaction by the general investing population. To avoid that overreaction, simply not listen. My approach is to only watch the market news channels on an infrequent basis. That works for me.
Best Wishes
I'm conflicted with this, too. If an advisor made such statements; well, what should a person conclude.
Thank you, Tony.
Taken to the extreme, just keep most of your portfolio out of the market. You'll "suffer a loss in a Bear, but typically not as much as the market itself experiences."
Unless you get back into the market at the right time, your "round trip" (through the bear and the subsequent bull market) can underperform simple buy-and-hold. Though by cutting one's losses (and gains) one may sleep better.
Then there are the bull markets one may hit inadvertently. Lightening up through those create sure losses relative to buy-and-hold, no matter how fast one reenters the market. How many people have tried timing the bond market for years, going shorter and shorter on duration as long bonds have continued to do well?
https://www.nytimes.com/2017/05/30/opinion/trump-wall-street-stock-market.html
Thank you for your comments.
I can see where my lazy submittal caused some confusion. I was not precise enough.
I did not mention time scale which is a critical distinction in market timing. I am not a buy and hold forever investor. I am also not a day trader. I do marginally adjust my portfolio one or two times a year based on my perception of market conditions. I do not define these adjustments as market timing decisions; they are based on very global conditions and my own assessment of them.
I make a point to ignore the hyperbolic shouting and excitement that makes up much of the business news. I make an effort to isolate myself from their many false assessments that can induce overreactions.
My adjustments, when I infrequently make them, are always on a modest scale, like going from 60% to 50% equity positions. Uncertainty in market direction always limits the magnitude of my infrequent trading.
I hope this helps. Taken over a long enough time scale, everyone is a trader.
ADDED THOUGHT: We all react to data, some more quickly than others.
Best Wishes