Switching up your asset allocations in a turbulent market can be tempting.
But not always a great idea.
Trying to time a portfolio shift is near impossible.
What will always win out in the end, is creating a strategic asset allocation – and sticking to it.
Investors on the edge
As a whole, investors are on the edge.
Turbulent markets have seen a swift decline in returns with high inflation and equity losses.
It is a natural reaction for investors to reassess their portfolios in an attempt to protect them from further losses.
Is a balanced portfolio an out-of-date portfolio?
With the current market volatility, the traditional 60/40 balanced portfolio may to some seem an out-of-date approach.
Some may see a switch to an approach that takes advantage of market trends to a more tactical approach.
It sounds simple enough to do.
Yet, those who risk this approach to switching their asset allocations, nearly always come off second best in the end.
Why?
Forecasting markets is near impossible.
Timing the market even more so.
If it was, we’d all be high-rolling on the weekends.
The reality of trying to time the market
Timing the market requires these 5 things to be lined up in perfect correlation.
- identifying a reliable indicator of short-term future market returns
- timing the exit of a specific asset class or market down to the precise day
- timing re-entry into a specific asset class or market down to the precise day
- deciding on the size of allocation and how to fund the trade, and
- executing the trade at a cost that is lower than the expected benefit
These 5 points must occur not just once but on an ongoing basis.
Doesn’t sound so simple now does it?
The rise and fall of the ASX
Let’s put this into perspective.
There were more than 13,000 trading days on the ASX from 1972 to 2022.
Out of those, missing the best 30 trading days would result in a 30% reduction in annualised returns for a local equity investor, from 10.8% to 7.3% over the 50-year period.
To add another element to the fire, almost half of the best trading days occurred within a week of the market’s worst days.
Now who would have picked that?
So, looking at the facts, not only is timing the market near impossible, but being out of the market at the wrong time will cost you dearly.
The bottom line is, at the end of your investment lifetime, the asset allocation decisions you make now, and stick with, will ultimately guide your success and investment returns.
It may sound dull, but it is tried and tested as the best way to achieve maximum results.
If you’d like to have a chat with one of our Financial Advisors or Accounting team, book an appointment today.
