A cautionary tale about market predictions
In the mid-2000s, there were a few well-known market makers predicting a substantial recession. One bond manager made a prediction that would end up being a blow-by-blow prediction of the great recession of 2008. The issue was he began sounding the alarm too early in 2005 and 2006. This left investors with a choice. When and how should you react to a market prediction?
You cannot count on market predictions
Now the first thing to keep in mind about this market prediction is that it was unique because it was correct. The flip side is it could have been a wrong prediction. In fact, this fund manager has predicted similar recessions would occur multiple times since 2011. Consider the opportunities an investor would have lost in the meantime.
Almost as important as “what” is “when”
Notice I mentioned that very prophetic market prediction coming out in 2005 and 2006. If an investor pulled their funds out of the stock market because of this prediction, they would have missed multiple positive years in the market. The problem of anticipating can compound. What if you hastily moved out of the market based on a market prediction only to notice that after a couple of years you are missing good market returns?
What if you jumped back into the market after that frustration? What if you jumped back in early 2008? You would have missed the uptick and walked straight into a downturn.
These lessons are universal. What if you bailed on the market when everyone went into quarantine? The broader stock market ended up making money in 2020 and 2021. What if you ditch the market today?
What’s your plan?
You can see how difficult it is to time the market, even if you have a good hunch about what will happen. The easiest way to deal with a frothy market is to have a strategy in place that anticipates the unpredictability of ups and downs. Here are a few methods that help:
Over time, certain asset classes outperform others. If you’re a “hands-on” investor, you’ll need to personally make some adjustments at least annually to get back to your target asset allocation. You will want to periodically sell some of the high performers and buy the under performers. This process forces you to sell high and buy low. Many employers also offer automatic rebalancing and professional account management for their retirement plans.
Using an asset allocation fund
An asset allocation fund can help you maintain an investment mix suited to your risk tolerance. A static allocation fund can help you stick to a desired portfolio over time while target date funds place you in a strategy that becomes more conservative as you approach the target year. These funds are helpful for investors who would rather not create their own portfolios. It also takes away the responsibility for rebalancing from you since it would be done automatically.
Working with a financial coach
Working with a coach or a planner can be very helpful in terms of assessing your risk tolerance and developing the right investment strategy for you.
By Cyrus Purnell, Contributor
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