Recently one morning on the way to work, the roads were dry, and leaves were blowing in the air. Around 9:00 flurries started as the weather had called for light snow followed by rain. By 11:00 the grounds and roads were covered and still no signs of rain. At noon, school closings started to scroll across the screen. In the back of my mind I thought, if this gets worse, I should leave. By 3:00 the calls were coming in with delays everywhere, accidents on the highways, and cars skidding off the back roads. It was too late; I’d missed the window to have an uneventful drive home.
The weather reports had missed the call on this storm. Friends and family called with warnings, which I ignored. I watched the storm worsen out my window and didn’t move. In hindsight, all the warning signs were there, and I still missed it. I wasn’t the only one; the roads were now a mess with stressed drivers. If we can’t time a snowstorm happening right in front of us, how are we supposed to time the markets?
In October the markets had their most volatile month since 2011. The S&P 500 gave back almost all its gains for the year, losing 6.9% in one month. It was a bit of a befuddlement though, as unemployment is at record lows, consumer confidence is at a high, and interest rates are extremely low by historic standards. With indicators looking positive, it can be extremely difficult to see these corrections coming. Markets will pullback like this from time to time, and it’s healthy. Valuations will become attractive again, and money will flow back in pushing markets up.
It sounds obvious, to make money when investing you buy low and sell high. The average investor has notoriously sold low and bought high creating many market skeptics along the way. There is a solution though to this dilemma. Systematic rebalancing of a portfolio will sell parts of the portfolio that have been doing well and reallocating to parts that have been lagging. By doing this, an investor will be trimming gains along the way and buying parts of the market that may be on sale.
Systematic rebalancing is a simple concept. Putting it into action can have some obstacles. It is worth spending time with a CERTIFIED FINANCIAL PLANNERTM professional to build a portfolio around your risk tolerance and to find the right intervals to rebalance.
The next time you think timing the market sounds like a good strategy, try timing a snowstorm.