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When is a Good Time to Get More Heavily Invested in Equities?


We regularly get asked by our clients, "when is a good time to get more heavily invested in equities (or get completely out)"?  If you are interested in investing in equities you should read one of our basic replies.   

Dear Client:


Your question, "when is the best time to get more heavily invested in stocks" 1s a very good one but at the same time,  very difficult to answer.  It involves not only an analysis of markets, but an overview of basic human emotions and behavior.  Both of these topics have attracted volumes of case studies over the last decade or so.  As you can imagine, neither can be adequately addressed in an email (and I suspect most people do not spend the time wading through such materials even when we provide them).  So, I’m going to focus on the highlights.  I’m happy to discuss these in more detail but that is something we should do in person or by video conference. 


Market Analysis – Independent studies show that even the experts, (individuals who are highly trained, licensed, and invest other people's money for a living) who trade actively are underperforming those who follow basic index investing - meaning staying broadly diversified and rebalancing periodically.  And these experts are not getting beaten by the indexes by a little, but by a lot!  For those investing without that training the investment outcomes are even worse. 


We know that trying to time and predict the markets is littered with failure because one has to predict when to get out, then when to get back in, then when to get out again, then when to get in again, etc., etc.,  Frankly, it is an impossible task and, again, the studies are very clear.  Such behavior does not maximize yields compared to basic index investing and rebalancing consistent with your financial plan.  This behavior has been appropriately labeled by the real experts (those who study actual investment results) as "a fool's game". 


Many people find it interesting to review charts showing how the major asset sectors move relative to each other year-after year.  You can find many varieties of these charts but one of the more reliable providers that I have found is Callan, and can be found by doing an internet search on "Callan Periodic Table of Returns".  You won't need the most recent chart to see my point.   When looking at such a chart, notice how significantly the sectors move from one year to the next.  Some asset classes, literally, go from the lowest ranking to the highest ranking (and vice-versa) from one year to the next.  Anyone who tells you they can predict these movements is not telling you the truth.  Simple mathematical calculations show that if anyone could succeed in their predictions, they would become a very rich person starting with a modest amount of cash to invest.  I will ask if you know anyone who has done that?  I don’t.  The financial news media would have you believe such people are everywhere, and of course they are not.   The vast majority of people who claim to be getting rich investing are really getting rich from selling their schemes to the public.  Don't fall for it!


Human Behavior and Investing – This is a much more recent field of study and it is starting to reveal that we humans are not good predictors of market movements.  This is why periodic rebalancing is proving time and again to be superior to human judgement around the timing of market movements.  No matter how logical human judgement can seem at the time, studies are identifying that humans (even the experts) tend to be clouded by several biases.  Here are a couple:


  1. We have a strong tendency to believe that what is currently happening will continue to happen.  This is called a “recency bias” which, in the case of investing, causes us to extend the current yield paths out, if not indefinitely, just a little more.  We then combine this (false) thinking with the belief that we (or someone) will know (and tell us) when to exit.  This is a complete myth.  Logically, we know the good (or bad) times can’t continue indefinitely and that is what has been so important about the benefit of rebalancing.  The need to rebalance puts investors on a schedule to take some of the higher profits off the table and place those earnings into investments that have not done as well.  Sounds like investing in the losers right?   No, it is actually selling high and investing low, which is so easy to say, but so hard to actually do AT THE TIME.   
  2. Two other human tendencies that impact investing are fear and greed and behavioral economists have uncovered some very interesting human behavior.  Simulating a loss on the stock market appears to strike the same synapses in the brain as being attacked or experiencing severe fear, thereby activating our fight or flight responses.  Is it any wonder so many people sell their investments after already experiencing steep losses?   If they ever re-enter the market, it's usually after it has recovered..  The conclusion of these behavioral studies is that we are not good at dealing with market movements, particularly strong ones.  When we are losing, our fight or flight impulses can pretty easily take control of our minds and bodies.  Our mind and body is screaming at us to “get out”.  The opposite also creates an investment problem, when we are “winning” we experience a natural form of intoxication - we want more and more.  These behaviors almost always cause investors poor and sometimes disastrous results .   This is where your financial plan can become a critical support tool, it helps to calm nerves when market goes haywire, which it often does for periods of time.


The impact of human emotions on investing is turning out to be a fascinating subject and the conclusions are pretty clear.  Humans are not naturally made for investing.  In fact, our instincts work against us.  Successful investing requires almost disinterested consistency.  In a volatile market, a calm and consistent approach is what's needed most. 


Frankly,  losses on occasion are a part of investing.  Trying to avoid losses or trying to squeeze out every ounce of gain has proven time and again to be "the losers game" when it comes to investing.  There is a very insightful book written by Charles D. Ellis titled, “Winning the Loser’s Game”.  During his career, Ellis was a teacher at Harvard Business School and the Yale School of Management and he is one of only 12 individuals recognized for lifetime achievement regarding his insights and research into the investment profession.  Unfortunately, it can be pretty dry reading but if you really are serious about understanding investor behavior and investment analytics, it is a must read.  If you want to try to out-perform index investing and rebalancing, this book will explain what your odds are – pretty poor. 


I could go on and on because there is a rich array of material available.  However, you are probably already getting the picture.  Unfortunately, you are not going to hear too much of this type of material from the financial news media.  Why?  Because they want you to believe making the rights calls is easy and if you just follow their advice you will “win”.  However, their “advertising” does not align with what independent research is telling us (not even close). 


So, Fullen Financial is not going to try to predict where the markets are going next (even Warren Buffet will tell you he doesn't know).  In other words, we are not playing "the losers game".  I’ve read the book (and several others for verification) and I know my odds of successfully predicting market moves are not good (pretty bad in fact).  So, we are going to stick with the investment strategy we put together when we did the detailed work of putting your financial plan together. 

I'm happy to speak more about this if you would like.

About the Author:  Milt Fullen is a CPA and CFP® fee-only fiduciary advisor with more than 30 years of experience in the financial services industry. He is a multi-year winner of Columbus Monthly’s Five Star Wealth Manager Award, and Fullen Financial Group ranks among Columbus Business First’s top fee-only financial planning firms in Central Ohio. We have helped over 200 individuals and families prepare for retirement, and we manage more than $180 million of assets on behalf of our clients. Our team of professional advisors has a wealth of experience and the best credentials in the industry, supported by the latest technology tools and a dedicated client service team.

Contact Milt by email: This email address is being protected from spambots. You need JavaScript enabled to view it.