Timing vs Time
When it comes to investing, history tells us that being too conservative can be just as costly as being too aggressive. This is a particularly difficult concept to communicate, especially when the market is trending down. After all, conventional wisdom would have us believe that you should flee from bear markets and find refuge in the safe haven of cash (money market funds). After a sustained downturn, you could then return to higher risk funds and receive all the benefits of a booming market.
Is this the short-term approach you are considering? If you are thinking about retreating into a more stable investment option you are not alone. In 2008, the PCA Retirement Plan, experienced a 13.3% increase in money market fund assets over a six month period when markets declined. The vast majority of that increase was due to participants transferring assets. Is this a prudent strategy for novice investors? Empirical research by academics and practitioners alike suggest market timing is not a good strategy for you.
We would love to be able to get participants out of the market at the top and buy back in at the bottom, but attempting this has proven to be an unsuccessful strategy.
It certainly seems logical that you should easily be able to sell volatile stocks before they descend into bear market territory and to then purchase them back again when they are ready to go back up again. Unfortunately, there is a major force working against you and it is attempting to employ a strategy called “market psychology”. In fact, selling at the top isn’t logical because at the time, the outlook seems quite secure and investors are happy because they have recently experienced good fortune in the markets. Conversely, opportunities to buy at the bottom don’t feel right either because the investor must buy “when the blood is on the streets”. It’s important to know that even seasoned professional investors avoid such strategies because market psychology makes predicting market tops and bottoms amazingly difficult. Investors who succeed over the short-run using a market timing strategy will inevitably begin to feel confident about their newfound “skills”. Frequently they will be captured by greed and pay the price at some later date.
At RBI we would love to be able to get participants out of the market at the top and buy back in at the bottom, but attempting this has proven to be an unsuccessful strategy. While there may be a few investment management organizations claiming success using a market timing strategy, long term history and investor experience is our guide and we must take a more tried and true approach documented repeatedly with each and every bear market.
There is a far better approach and it is committed to a long-term proven investment strategy. The key to dealing with market volatility is: 1) knowing your risk tolerance, and 2) adjusting your portfolio over time to avoid significant losses as you approach retirement. Achieving the appropriate long-term rates of return requires that you weather market risks in aggressive asset classes when you are young. As you approach retirement, reducing volatility will help to conserve and protect your retirement account when significant losses should be avoided. The PCA Target Retirement Funds provide you with these strategies and offer you the maximum amount of investment assistance throughout your lifetime in the fund. Through these funds, the investment professionals at RBI will manage a diversified portfolio for you within thirteen different age categories, and maintain a proper portfolio allocation for every period of your life. We would be pleased to talk to you about a strategy that will offer a proper portfolio of ‘age-appropriate’ investments. Please give us a call to set your course for a more secure investment plan.
— Gary Campbell, President