This article originally appeared in the Knoxville News Sentinel’s business column on October 21, 2018.
The market has recently had the long-awaited “hiccup.”
I happened to be at an investment conference when the market was off 1,300 points over two days. Dr. David Kelly, chief global strategist at J.P. Morgan, was one of the keynote speakers. He had some excellent points. Some of those points were technical and some of them were just plain common sense.
He both opened and closed with weather analogies including the quote from President John F. Kennedy Jr.’s State of the Union Address in 1962 when he said, “the time to repair the roof is when the sun is shining,” along with the old saying “make hay while the sun shines.”
Both of these approaches are appropriate to investments.
In my opinion, “fixing the roof while the sun is shining” means taking gains off the table when the market is up and reviewing your portfolio diversification, as well as your needs.
Your needs should always come first and cash flow requirements should also be addressed. Ensure your risk tolerance is properly represented in your portfolio so you can take a long-term perspective that will help you tolerate market volatility.
And then there’s the old proverb “make hay while the sun shines.”
In rising markets, the 24 months prior to a bear market, the average market increase will be about 41 percent. I was astounded to learn that number. In the 24 months following a crash of 20 percent or more, the average return is -1 percent including the crash. That equals an approximate 10 percent return over 4 years. That’s not too shabby in my book, but certainly not a straight-line return.
When we realign portfolios, we never totally sell out of the market, which is referred to as market timing. You have to be right twice to be a market timer – right when you sell and right when you buy back. No one can perfectly time the market, so most professionals rely on diversification to weather the storm. It’s important to regularly realign your portfolios.
By realigning portfolios to your target weightings, you still have capital at work to capture the gains towards the end of a long bull market, even though you have taken some of the gains off the table.
Another fun analogy of Dr. Kelly’s had to do with the Fed either tightening or easing interest rates. When economic times are as good as they currently are with full employment and inflation at or approaching target rates, there is no reason to “ease up” on interest rates.
His analogy was that would be like taking two more kegs of beer to a fraternity party at 2 a.m., instead of the prudent thing of starting to water down the beer at 2 a.m.
Wow, an economist that makes sense and cents.
So, let’s keep doing both, fixing the roof while the sun shines. And making hay.