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As they say “all boats rise on a rising tide” except presumably those with holes in. Equally, all portfolios should rise in a rising market – except those with investment holes in them. The question though is to what extent can you try and keep your rising gains even when the tide does turn.
This is a question few investment people like to address; after all they all like to talk about their successes and few wish to be reminded of their financial failures. The fact is though that when it comes to equities we have been in a bull market now for 60 months and by any measure this bull is getting somewhat tired.
As the old phrase goes “you can’t time the market, it’s time in the market.” As an investment truism it is not wrong as frequent trading and frenetic asset swapping can just incur extra cost with no guarantee of much gain – except for your commission earning stockbroker! In fact, the power of compounding of dividends is generally a far more reliable path to returns than single stock selections.
However, that just establishes a dumb or “fire and forget” portfolio, which would take no account of any external influences. As a strategy it is not a stupid one, but it does mean that as far as tidal flows go, your portfolio will be destined solely to rise and fall with the tidal effects of market sentiments. As King Canute found when discussing tidal flows in the English Channel with his acolytes, he too had no power to control the tides; but he did have the power and authority to move his deckchair to avoid getting wet – and so do you with your portfolios.
The construction of a sound portfolio will probably have been based on your chosen plan for longer term strategic asset allocation. This generally is based on historical data in order to provide a balance of risk and expected return for your client. However, the application of a forward view – or tactical asset allocation – will provide more opportunity to try to secure gains and to move out of those assets perceived to be at greater exposure to tidal flow and erosion. Erosions can, of course, always be caused by being tethered onto something more fixed and secure as the water rushes away, be it cash or something similar.
No one like values going down, but at some stage this tide will turn and it’s right that we both prepare for it and remind clients that their investments, like the tides, will go up and down, as well as reminding them that they are in safer hands with you as their professional planner.