With recent record high markets, the war in Europe, high inflation, among other things, there is no shortage of reasons for investors to start questioning their current portfolio allocations. As witnessed with the COVID-19 pandemic most recently, we know that uncertainty causes investors to consider shifting their investments to more conservative holdings.
The media gives us no shortage of headlines to support our fears and the decision to flee to safety. And so, as always, it is essential to step back and make sure we are not letting our emotions drive our investment decisions.
Asking the question, should we be making changes to our portfolio? Is no different than asking whether we should try to time the market?
The data has always shown us that no one can consistently outguess the stock market. When it comes to getting in and out of the market, it becomes exceptionally difficult because you need to get two decisions correct; when do you get out? And when do you get back in?
This article looks at Morningstar’s research on tactical (making market timing decisions) vs strategic (a set allocation with minimal adjustments). It clearly shows that funds sticking to their allocation have more success over time than those making tactical decisions.
This is a problematic outcome for many investors to accept, especially in challenging times, because we all feel that we should do something about it if things are not going well. This probably comes back to how we were raised, hearing our parents tell us that we need to work hard if we want to do well.
To steal a quote from the article, “A portfolio is like a bar of soap. The more you handle it, the less you have.”