Much has been written about the folly of trying to out-smart the market by market-timing, i.e., selling all stocks when the market is the highest and buying all stocks when the market is the lowest. Of course, while that is a quaint idea, nobody has ever been able to do that on a consistent basis.
But, there is a nugget of wisdom to it When risk rises, the percentage of the portfolio allocated to cash should also increase. (Being 100% cash is not prudent.) The nugget of wisdom is that we are looking at risk - not returns.
Does a person significantly reduce their upside potential if they shift heavily into stocks when the level of risk decreases? Sometimes, they do, because the market has gotten ahead of them! Sometimes, they don't! Take a look at this chart:
But, there is a nugget of wisdom to it When risk rises, the percentage of the portfolio allocated to cash should also increase. (Being 100% cash is not prudent.) The nugget of wisdom is that we are looking at risk - not returns.
Does a person significantly reduce their upside potential if they shift heavily into stocks when the level of risk decreases? Sometimes, they do, because the market has gotten ahead of them! Sometimes, they don't! Take a look at this chart:
In the past 112 years, the Dow has dropped a whopping 30% thirteen different times and been followed by a bull market each time. Today, we're enjoying another bull market, but it is still a weak and short rally compared to averages (the gray diagonal line). That tells me the bull probably still has lots of pasture to run in.
The economy still enjoys greater underlying strength than the market does. Both are just waiting for the politicians to get out of the pasture . . .
