Article by Marcel LeBlanc for the Times & Transcript published on June 21, 2019

You’re sitting there, looking at your investments and notice they have dropped in value and you’re wondering “Why didn’t I get out of the markets before they fell? Wasn’t my advisor aware that the markets were going to go down?” As an advisor, I’ve had this conversation hundreds of times with many clients over the years and the truth is that, even if your advisor knew the markets could be heading into a downturn, moving your investments out of the markets was likely not in your best interest.

chris liverani 552649 unsplashHere’s the truth: timing the market - investing into the markets at the bottom of a cycle and selling at the top of the cycle is really hard. Even the most talented investment experts won’t get it right consistently most of the time. The problem is that most retail investors are emotional beings who tend to act on emotions even when it’s illogical and not in their best interest.

When markets are up and everyone is making money, greed settles in and everybody wants to believe that the good times are the new norm and will keep going indefinitely. If everyone else is making money participating in the markets, who really wants to be the only one not making money? Greed can easily blind investors from logic and facts. It’s easy for an eager investor to forget that the good times will eventually be over and that the markets will turn lower. Investors want to believe that markets will keep moving higher even after the downturn has started. This is why most investors have difficulty timing the top of the market.

Most investors understand that markets are cyclical and that what goes up must come down. But during the inevitable downturn, investors fall victim to their emotions once again. Panic sets in after their pain threshold gets breached. They start thinking it’s best to cut their losses now before things get worse. By getting out of the markets after the downturn, an investor isn’t invested to gain when things turn around. When things do get better, after the market downturn and the subsequent rebound, investors get confident enough to get back in - missing out on the massive returns from the rebound. Missing the returns they need to offset the losses from the downturn.

The part of market timing that most investors usually forget is that in order to use the strategy successfully, you need to be right and make the appropriate moves not once but twice in the same investment cycle or else you’ve dug yourself into a hole. Even if you were lucky enough to call the top of the market perfectly and move your money into safe investments right before the next downturn, now you have to figure out when to put that money back into the markets. You’ve called the top which is hard enough now you have to call the bottom and catch the rebound to make it all worthwhile. If you miss the rebound, you will likely miss most of the best days, weeks and months of performance. This will have a drastic impact on your results.

The other thing to consider is that your call might be wrong. If you think the market is at the top and you move out of the markets, but the markets keep going up, what do you do? Do you go back in and hope you get it right the second time? And when you get back in the market after a downturn, but the markets keep falling, what do you do? Do you get back out in hopes that you can better call the bottom the next time around?

Most professional investors understand this and use it to their advantage for long-term investment success. It’s the reason why advisors usually don’t recommend moving their client’s money in and out of the markets. It’s a better more reliable strategy to stay invested through the cycles so that you don’t fall victim to emotional mistakes or bad timing. Investors will get the good with the bad. Fortunately, there’s considerably more good than bad.

I’d like to finish by saying that rebalancing and reallocating a portion of your portfolio in anticipation of a possible downturn or rebound can make sense. If the stock portion of your portfolio represents too much of your overall portfolio mix in the later stages of the investment cycle, it can make sense to rebalance using a strategic or tactical allocation. Same goes for when your stock allocation is lower after a downturn. Feel free to reallocate. But I would argue that this type of decision should be made with the help of knowledgeable investment professionals whose job it is to help clients invest rationally with a clear plan for long-term success.