Ride the waves, or jump ship?

By Gary Silverman, CFP®

Over the last year, I’ve had a couple of clients run away from the market. They came in, said that there was going to be a massive sell-off in the near future, and they wanted out before anything bad started happening. Admittedly this hasn’t been a great strategy of late with the stock market making record highs. But let’s face it, eventually the market will cycle lower, or have a correction, or have a crash. So the question remains: When should you get out to protect your winnings?

Now, y’all know me (or at least my regular readers do). I’m a stick-it-out person when it comes to market events. But I’m not you. And for you, it might make sense to hide. Of course this is fraught with its own dangers. Let’s take some time to look at it.

There are many ways to strategize your investing. For our purposes today I’m going to divide this into two: Strategic investing and the tactical opposite, market timing.

Strategic investing is in the same camp as buy-and-hold. The difference is subtle:  it’s buy-and-periodically-rebalance. Still, the idea is that you build a portfolio that can withstand whatever the market throws at it. Yes, the waves may batter the ship, and the passengers might get seasick, but you’ll get through the storms to your destination.

Tactical investing tries to get you into a market when it’s on the rise and out of it before it falls. Because there are many markets there are many things to get in and out of. One year you might be all-in the stock market, the next half your money might be in junk bonds and real estate, and then you might be in cash for a few months. This is like a speed boat…it gets through the waves and zig-zags around the economic storms. If done successfully it will hands-down beat a strategic stance. But if it takes a path around a storm that doesn’t materialize or gets caught in one that it didn’t anticipate, then you might not make it to your goal.

I’m in the strategic camp. My form of investing will allow client portfolios (and my own) to ride up and down the economic waves. And while we adjust the portfolios to try and match our clients’ tolerance for risk, when things like the financial crisis happen it can strain their emotional tolerance. But in the case of the clients I’m talking about today, their unease was not due to what the market was doing to them, but what they thought the market would do to them in the future.

The imaginary (but certainly possible) near-term economic disasters made these clients not want to be on the good ship Strategic, but rather jump into the Tactical speedboat and run quickly away from the perceived oncoming tempest.

The problem is that for most people who panic getting out of the market is not part of a studied, tested, and confirmed investment management plan. Rather it’s due to the ramblings of a talk-show host, a blog that purports to have an inside scoop, or just being scared about the world around them.

That’s the background. Whether you should join them and head to the exits will get answered next week.

This article was published in the Wichita Falls Times Record News on January 1, 2017.

Gary Silverman is the author of Real World Investing: A Sensible Approach form the Guy Without the Tie,  available from abpbooks.com or amazon.com.