Broker Check

Don't Believe The Hype

August 09, 2018
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The graphic above is the headline story for Financial Advisor Magazine today -- a warning that stocks are even more overvalued than they were in 2000!  Of course, this is just a thinly-veiled sales pitch for a market timing mutual fund that claims to be able to deliver equity-like returns with less volatility through astute market timing.

Lest you think I'm exaggerating, here is a snippet from the fact sheet for the mutual fund that is apparently supposed to help us capitalize on market inefficiencies and instances of overvaluation: 

Who wouldn't want to invest this way?  And why wouldn't I put my hard-earned CFA charter to work, periodically nip and tuck your portfolio, and help you capture higher-than-market returns with less risk by steering you clear of overvalued markets while loading up on the next great opportunity?  

There are a bunch of reasons, but let's just focus on one: it doesn't work.

Moving into and out of the stock market is all but assured to lower your long-term returns relative to an all-stock allocation.  You might miss some of the declines but you'll miss as many (if not more) of the gains as well.  But if lower volatility is what you're after, and you can afford lower returns, why not just add a short-term bond fund to your stock portfolio?  No timing, no adjusting, just set an allocation and rebalance it periodically.

Turns out a rebalanced stock/bond portfolio exhibits similar short-term fluctuations as a market timing (ok, "tactical allocation") approach but with significantly better returns -- Portfolio 1 in the graphic below is the market-timing mutual fund, Portfolio 2 is an annually rebalanced 65/35 stock & bond allocation.  There's almost 40% difference in ending wealth over the last decade in favor of the buy/hold/rebalance approach, one that included two vicious bear markets (2008 and 2011)! 

As an investor, you're inundated with daily headlines about a pending market decline and how stock prices are obviously overvalued.  I devoted an entire newsletter to the subject last month.  My advice: don't believe the hype!

(source of data: market-timing mutual fund = GLBIX; 65/35 allocation = mix of DFA asset class mutual funds listed in July newsletter)

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Past performance is not a guarantee of future results. Index and mutual fund performance includes reinvestment of dividends and other earnings but does not reflect the deduction of investment advisory fees or other expenses except where noted. This content is provided for informational purposes and should not to be construed as an offer, solicitation, recommendation or endorsement of any particular security, products, or services.