Now is not the time to deviate from the good advice and strategies that have worked for investors
over the years. Our recommendations to investors right now are to stick to the basics:
Stay diversified
It is important to include cash, equities and fixed income in your portfolio. How much you allocate to each investment class is a function of your time horizon, your risk tolerance, your tax bracket and your cash flow requirements. Each asset class plays an important role. Having cash provides peace of mind because it is liquid and readily available. It can protect you against market risk or sequence of return risk by not having to liquidate other assets at an inopportune time.
Although you may be seeing red when you log into your portfolio dashboard, including equities in your portfolio is important because they can appreciate at a rate greater than inflation of the long term. So, equities can help address inflation risk and longevity risk.
Higher inflation and rising interest rates have put downward pressure on bond prices. Bonds may lag equities in good years, but they can help provide stability in a portfolio.
Time in the Market is better than timing the market
Nobody can exactly predict a stock’s future price but that doesn’t stop many from trying to do so. Study after study over the years has shown that “market timing” does not work and that “time in the market” is the way to go.
“Market timing” means buying a security with the expectations of selling it at a higher price in the short term, or selling with the expectation that the security price will fall and buying back at the lower price. Market-timing investors are essentially trying to “beat the market” by outsmarting it – or so they think.
While market timing may initially seem to be a variant of the popular saying “buy low, sell high”, the fact that the future is uncertain and that stock prices change rapidly, means that it is basically impossible to accurately and consistently determine when a security has hit its lowest or highest point.
“Time in the market” means relying on a strategy where you don’t try to guess when the market is at its lowest or highest point. Instead, you buy the market knowing that your timing is probably going to be off, but that eventually, the fundamentals matter more than the timing.
The “time in the market” investor will then stick with the market until the original reasons for buying change or they’ve reached their intended goal e.g. they’re now approaching their retirement years.