This is a scenario I’ve put a lot of thought in, because frankly, this is my situation. Attempting to time the market is really hard for a number of reasons that I’m not going to get into here (google it, there’s plenty out there on it). But I also don’t go to the other extreme where you stick to your asset allocation strategy 100% regardless of what the market is doing. I think there’s room for some nuance, and maybe some marginal tactical changes if kept simple enough.
Let’s see if we can map out such a strategy.
The first thing to note here is that we’re in accumulation mode. I’m a firm believer that investing advice differs greatly between accumulation mode and decumulation mode (retirement). Again, this is accumulation mode advice only.
After a largest move lower (crash?) in December, the stock market has rebounded quite a bit in the early goings of 2019 essentially erasing the move lower at the end of the year. We’re still below all-time highs reached in 2018 which I think is maybe partially significant. The economy is definitely slowing, but not necessarily heading into a recession in my opinion. But the Fed has changed its tune dramatically and the Fed drives the market especially in the short run.
I wrote the following during the first week of 2019:
As of now, I don’t think we hit a recession, and there are three catalysts that will make the market bottom and move higher later in the year:
1 – The end of the Fed’s rate hikes – If I had to guess, the Fed is done hiking. They will eventually make this clear to the market.
2 – A trade deal with China – This will remove the uncertainty involving trade.
3 – An infrastructure deal from Congress – The one area of cooperation between the Democrats, Republicans and President Trump, in my opinion, will be a bill on infrastructure spending.
The Fed change happened so quickly that my prediction may have already occurred. Or maybe not.
I don’t love where the market is right now. It feels like it’s moving up by default and a slow melt-up like fashion. There’s not a lot of science behind this, but just my gut after following the markets for a decade or so. But again, I’m not looking to trade. I’m just looking to make really small tactical adjustments to an established strategy.
In fact, having these adjustments built into your strategy is even better. The more you can have a set, written strategy that you follow in any market, the better investor you will be. The less you’ll rely on emotion and typically this means you’ll get better performance.
While this isn’t a full blown personal investing statement, my investment process has the following general guidelines:
- I’m in accumulation mode. The goal is to acquire assets. While some chunks of cash is fine every now and then, the goal is to deploy the cash.
- Overall my asset allocation will range from 90% stocks / 10% bonds to 50% stocks / 50% bonds. This range gives me the flexibility to adjust based on what the market is doing.
So how does this asset allocation range work? Am I proposing selling stocks and buying bonds whenever we feel like it? No.
My rule is that I don’t decrease stocks allocation by selling stocks. If I sell an individual stock, that money goes right into an equities index ETF in order to maintain the same asset allocation. The only way my stocks allocation percentage is allowed to decrease is if the stock market loses value. This will prevent me from “trading” stocks something I definitely want to avoid.
On the flip side, I am permitted to sell bonds to increase my stocks allocation up to 90%. But if I do that, my rules state I can’t reverse it. Remember I don’t decrease stocks by selling then buying bonds.
But, the flexibility of this target range means that when I contribute new funds to my investment portfolio (remember, I’m in accumulation mode), then I have the flexibility to put that money into bonds if I’m nervous about where the market is up to a 50% bond allocation. Note that it’s going to be pretty rare that I achieve a 50% bond allocation at any time especially as the size of the portfolio and average returns generated start to overwhelm my annual contributions to the portfolio.
So, this strategy works for me. It’s rigid enough to prevent trading in and out of the market (something that is really impossible to do), but flexible enough to where I can make small adjustments with new contributions based on my sense of where the market is.
So, the final question here is… is the market overvalued? It’s impossible to have a definitive answer. We’re ten years into a bull market with a slowing economy. I’m comfortable putting new money into bonds for the time being until I change my sentiment on where we are. Note that if you’re changing your view of the market on a daily or weekly basis, you should ignore it. If the market breaches the all-time highs of last year, and starts to go higher, I might reconsider, but for now I’m a little cautious.
One final comment. I’ve got a heavy Netflix position. Something obviously a bit more risky than just having all my equity allocation funds in index funds. So, having a slightly larger bond allocation during my Netflix bullish phases might actually make a bit more sense. If my thesis on Netflix is accurate, then if the market goes up (meaning my bond allocation underperforms stocks), I’ll likely make up for it with a high-beta Netflix position that rises more than the market rises. Something to ponder…