Back in September, I wrote about the importance of diversification even as the market hits new highs as it did during that month when the S&P 500 edged above 1,400. The index closed recently at 1,500, near a five-year high. This compares to the low point for the index during the market downturn of 2008-09 of 677 reached on March 9, 2009. Now, we’re close to the all-time high for the index, which was 1,565 reached on October 9, 2007.
The current rally off of the financial-crisis-induced low is nearing four years in duration. According to data from S&P, the average duration of a bull market run off of a market low is 68 months. The range for nine such periods from 1946 through 2000 was 26 months off of a market bottom in October of 1966 to 148 months off of a market low reached in December of 1987.
Based upon these historical examples perhaps the financial pundits are right, this rally still has some room to run. One such investment manager recently said that while everyone’s situation is different, he would suggest that investors consider going over their normal equity allocation by 10-15 percent.
What he suggests sounds like tactical asset allocation, where you might allow a portion of your portfolio to hit the high end of your allocation range and stay there for as long as you feel that that asset class or style might outperform the market overall.
In fact we recently did this to a very limited extent in conjunction with the investment committee of a foundation portfolio for which I serve as investment adviser. We decided to let large cap and small- and mid-cap equities remain a bit over the midpoint of our target asset allocation, but still within the target range. International equities remained in the lower half of the target range so in total the percentage of equities and real estate were pretty much in line.
This client has a very long time horizon. Further we have set all distributions from the institutional mutual funds held by the foundation to go to cash, so we have a significant portion of the annual cash withdrawal funded from that source. Our decision was also based upon the investment process outlined in the foundation’s written investment policy statement.
Tactical allocation is far different from going out and loading up on stocks. Professional traders and money managers might do some of this, but they generally have very defined rules for when they will sell. In contrast I've had conversations with individuals over the years who wanted to wait until they felt good about stocks before buying after a market downturn. This often means buying high and selling low, often out of fear.
I have no idea what the stock market will do over the next year let alone the next week. Frankly I really don’t care. My opinion is that your financial plan, your tolerance for risk, and your financial goals should drive your investment allocation. Any buying or selling of stocks or any other type of investment should be driven by keeping your asset allocation in line with your financial plan.
Roger Wohlner, CFP®, is a fee-only financial adviser at Asset Strategy Consultants based in Arlington Heights, Ill., where he provides financial planning and investment advice to individual clients, 401(k) plan sponsors and participants, foundations, and endowments. Roger is active on both Twitter (@rwohlner) and LinkedIn. Check out Roger's popular blog The Chicago Financial Planner where he writes about issues concerning financial planning, investments, and retirement plans.