It's the great investor fantasy: quit the stock market at the top and buy back in at the bottom. The lure of timing the market sells millions of books and is standard fodder for financial media. It’s also especially tempting at times like these, when there’s so much fear and uncertainty about Brexit and also talk of a possible recession.
But the reality of market timing rarely lives up to the promise. Not even the gurus have much of a record. And even if your logic about valuations is impeccable, there’s no guarantee the market will come around to your view. If you get lucky, great, but it could easily go badly wrong.
The good news is that second-guessing the market just isn’t necessary. Here are five better ideas you might want to consider instead.
1. Take the long view
Instead of trying to time the ups and down of the markets, why not simply change your time horizon? Over the very long term, patient stock investors holding diversified portfolios have almost always been rewarded. To be sure, not everyone can take the long view, such as those who need to access their money within the next two or three years - which is why these people shouldn’t have this money invested in stocks.
2. Construct a portfolio for all seasons
Rather than chop and change your portfolio in response to changing market conditions, it’s much more sensible to construct a portfolio for all seasons. Everyone should have a balanced asset allocation - certainly a mix of stocks and high-quality bonds - that matches their capacity for risk. Defensively minded investors might have just 50% or less of their portfolio in stocks, with the rest in bonds. Spreading your risk across different asset classes and geographies will reduce the impact of a steep decline in one particular market.
3. Occasionally rebalance
In general, the less you tinker with your portfolio, the better. And any changes you make should be done in a strategic, structured and disciplined way.
A sensible strategy is to rebalance your investment mix periodically, so you bring its asset allocation back into line with your target portfolio weights. This effectively forces you to sell high and buy low, which is what you should be doing.
4. Drip money into the market
If you’re worried about the stock market and want to reduce your risk, try dollar-cost averaging. Say you have a sizeable sum - perhaps an inheritance or a year-end bonus - that you want to invest. Instead of going all in and investing the full amount in one go, you can drip small amounts into the market over a period of time. You might end up with slightly lower returns. But so-called pound cost averaging is a useful way of helping you sleep at night and minimising regret.
5. Carry more cash
Everyone should hold enough cash to cover three to six months of living expenses, in case of, say, unexpected medical bills or you lose your job. But nervous investors may want to hold more than that. The advantage: your portfolio will hold up better in a market downturn, plus - if you’re feeling courageous - you’ll have extra cash to put to work when share prices are lower.
