Mr. Trump won and whether you hoped he would or not, you likely know that the American and world stock markets are jittery wondering how many of his pre-election promises he intends to keep. Will he really tear up the NAFTA? If he’s building a wall, how much concrete will he need? Will world investors pull their money out of US corporations? Some traders who call themselves investors are wondering if they should sell off their equities now, keep the money in cash, and then buy back in after a significant world stock market drop.
Why Do Brokerages Love Uncertain Markets?
There’s someone who will definitely make money if you sell your holdings now and buy back in later: the brokerage. You’ll be paying a fee on each position you liquidate and paying another fee for each time you buy a new equity or ETF to get back in the game. They win on both plays.
“Churning” investments is always a source of income for brokerages. Brokers with their clients’ best interests at heart never buy or sell investments just to earn commissions. Unscrupulous financial advisors, however, won’t discourage and might even encourage customers to rack up extra commissions.
What Should I Do If I Don’t Know Which Way the Markets Will Go or When?
The truth is no one is always accurate predicting which way a stock market will move and when. Some people have better luck at it, which they almost always attribute to skill, but no one has a perfect record.
I would not sell shares of equities or ETFs just because the market MIGHT move down.
The Benefit of an Asset Allocation Plan That Designates Fixed Income and Equity Proportions
Instead of trying to guess about the markets, I prefer to use an old trusty technique: asset allocation.
I set an amount to hold in “safe” non-equity investments and an amount to hold in equity investments.
To make the amount useful, as I’m still saving money each year, I set it as a percentage of my total holdings. Because I am incredibly risk-averse, as discussed many times here, I have set it at 50/50 even though I have a long time till retirement.
I re-balance to stay within that 50/50 split on a regular basis.
How Does Setting a Percentage for Safe Fixed Income and Riskier Equity Investments Help Make Market Timing Decisions Easier?
Why does this strategy make my investing decisions easier?
Well, if the stock market falls suddenly, my % held in equities drops. For example, it might drop from 50% of my total monetary assets to 35%.
If it does, I then have too much in my “safe” fixed income investments. I now have 65% in cash, GICs, and bonds.
So I use some cash to buy more equities to get back up to 50%. If I can, I use my “new” investing money that I’m saving from my income. If I can’t, I use some of my fixed income cash or sell some bonds to get the cash I need.
Similarly, if the stock market bubbles up to all time highs, my percentage of equities might grow to 65% and my fixed income by comparison drop to 35%. If I don’t have enough “new” money to bring my fixed income back up to 50%, then I sell a bit of my equity holdings to return to a 50/50 split.
Does Keeping a Fixed Asset Allocation Help Avoid Buying High and Selling Low?
As you can see from my descriptions above, keeping my 50/50 split forces me to sell high (when my equities have grown too quickly for my fixed income to keep up) and to buy low (when my equities have fallen in value too low to match my fixed income.)
I don’t have to actually guess if it’s a “low” or “high” market. For ME the market is high or low and the decision is made.
Does This Strategy Work All the Time with 100% Optimization?
I have no idea! I just know it’s working for me, so far. I’ve read the theory in many investing books as well. So far I haven’t read anything that says it is a terrible idea.
If you are investing for a long-term goal (e.g. 15 years or more in the future) this is a strategy I would suggest you consider.
Won’t Another Strategy Work Better?
Decide for yourself whether an alternate strategy is more likely to out-perform this one. Don’t forget, though, to include the emotional factors and the cost of indecision of any potential strategy. For example, trying to randomly guess when to sell and when to buy back in is a difficult process. It tends to lead to emotional distress and second-guessing.
What Am I Doing Differently With Our Investments Now that President Trump Has Been Elected?
Nothing, yet. I’m not selling anything right now, and I will invest my new money into whichever asset class is out of whack with my allocation plan. If the markets tank, I will re-balance as best I can.
Do you try to keep a certain split between fixed income (cash, GICs, bonds, possibly certain types of preferred shares) and equities? Does it help you decide when to buy and sell? Please share your views with a comment.