A client from my life just before this one wrote me:
"Your questioning and caution of the markets these days are what impresses me about you. You were cautious with my entry into the market at the end of 2014 looking for opportunities."
I am not in favour of selling and buying in an effort to "time the markets" on a regular basis. However, after more than 35 years of watching markets and understanding both short-term trading and long-term investing behaviour (from market participants), a case can be made for being patient when putting money (especially new $$) into the market if certain asset classes appear to be overly expensive.
I have had this conversation many times with clients and former colleagues: different asset classes will out-perform (or perhaps we can say "over" perform) at certain times in a market cycle and they will under-perform at certain times.
Once you are fully invested, re-balancing is the key to making position adjustments because the portfolio will tell you when a particular asset has out-performed because the weighting (of that asset) will move to a level above the initial allocation weight.
For example, if you started with US equities at an 18% weight as part of the initial asset allocation and when re-balancing (later on in the life of the portfolio, after US equities have out-performed) you find yourself with US equities at 22% of the total portfolio, the action required to get you back to the original asset allocation is to sell (take profit) on the 4% that you are overweight.
If you are overweight one asset class because of out-performance, then you are underweight another, somewhere in the portfolio.
The cash generated from the sale of the US equity overweight is then used to purchase whatever you are underweight.
The mistake that many make is hanging on to the overweight position because it is going up. Or worse changing the allocation to allow for a greater weight in the over-weight position.
That is a trap that many fall into. The key to long-term growth is the discipline of re-balancing. A good portfolio manager will have that discipline.
Getting fully invested is another matter:
It is easy for an advisor or portfolio manager to fully invest you immediately, it requires a lot less work.
However, understanding the cyclical nature of markets and asset classes is where a good manager can add value over the longer term.
If US equities are out-performing and over-valued, a correction is a greater likelihood as a law of averages.
Last October was no exception.
If you waited patiently and kept new cash dedicated for US equities (and some other equity assets) you could have got prices better than where they closed at the end of December 2013. Waiting certainly paid off.
We sat on some $$ ear-marked for Canadian Government Bonds from 2011 until mid 2013 ("taper tantrum") before putting that money to work. We missed out (opportunity cost of waiting) on perhaps 2% (net) of income over this period, but saved asset depreciation of over 10% and picked up cheaper assets to boot.
There can and will be opportunities and good (patient) managers will be able to pick up this extra value from time to time (and earn the fees that they charge).
Today is "Webinar Tuesday" at High Rock, feel free to listen in on our recorded version later today.
Scott Tomenson,CIM Managing Partner, Chief Investment Strategist