Many people have their fund and/or ETF investments on autopilot. The phrase "watchful waiting" comes to mind. In other words, most of the time they're not doing very much with their investments but might be swayed into doing so if some very significant information happened to come along.
However, for those in the world of work and regularly committed to putting a piece of their earnings aside, such individuals may still be choosing to make investments regularly, such as through a 401(k); likewise for many individuals as soon as they see that they might have some extra money that could be invested.
Hundreds of years of history suggest that at least some of an investor's money should go into stocks, except for the truly risk averse, or for those who don't feel any real need for them. On the other hand, someone who just wants to save may be content to merely keep any extra money in a checking account or low interest savings account or certificate of deposit. Of course, diversified investors may choose to further divide up any new money going into their portfolios into bonds as well as possibly some cash.
When one regularly like clockwork, that is, without making a new assessment on each occasion, puts new money into stocks, there is the benefit not only of potentially growing one's assets, but of taking your own emotions and judgments out of your investing. Whether the stock market is up, down, or going sideways, you are basing your actions solely on the availability of extra money to invest, not on the perception that this is indeed a relatively good or a relatively poor time to invest.
Another benefit is that each separate investment is presumably going in at varied prices, sometimes high, but sometimes at lower ones, minimizing the chances that you will, instead, pool up your dollars elsewhere and invest it all at once, possibly at just the wrong time. In other words, you are spreading out your risk, which is sometimes called dollar-cost averaging. When done over a very long period, it should certainly help you avoid always buying when prices are high.
Many investors, especially those putting aside money automatically as deductions from every paycheck, such as within a 401(k), retain the same breakdown of where the money is to go for very long periods without alteration. For example, 60% might go into one or more stock funds and 40% into one or more bond funds. They have determined that, for them, such a breakdown is how they want to divvy up their money, and typically ignore fluctuations that might show that for the last x months, or even years, stocks (or bonds) have been particularly unappealing, or appear particularly risky.
While it's impossible to say in advance that investors who follow the above approaches are making a mistake in adopting what I'd call a "steady as she goes" approach, an approach that certainly cuts down on having to frequently make constant decisions about each new upcoming investment, it should come as no surprise that there is an alternate approach. It favors tending to hold off on making new investments until "when the time looks right."
I myself have followed the latter approach for many, many years now, and looking in retrospect, I can't say that I have many regrets for having done so. In the remainder of this article, I will review how one might successfully implement this strategy without completely abandoning many of the "steady as she goes" notions, yet without having to spend hardly any extra time in making decisions, but nevertheless providing the potential to put one ahead of the steady eddie approach.
A Brief Review
It has now been nearly eight years since I published an August, 2008 article on this site entitled Buy, Sell, or Hold? What Our Research on Performance Shows. In the article, I made the case for using objectively derived data, or "signals," to determine both the relatively best and relatively worst times to buy stock funds. At that time, the data suggested selling rather than buying stocks for the immediate future. As you may recall, at that time, we were deeply mired in a severe bear market.
The resulting signals continued to predominantly show "sell" for a few more months until the end of Oct. 2008. At that point, all previous sell signals changed to what I called hold territory, "hold" being attractive but somewhat less so than an outright "buy."
A little further on, in Nov. 2009, these hold signals did become buys. The signals repeatedly pointed to stocks as being attractive continuously until mid-Oct. 2013 when they finally reverted back to being sells in accordance with my research's criteria for a sell designation. (Note: I later changed the label applied to these sell signals to "reduce," to suggest that one may want to simply reduce an existing stock position, rather than completely sell it.) Since that mid-Oct. '13 date, the majority of the various categories of stock funds/ETFs have again become holds, while some remain as "reduce," complying with my 2008 research that showed it is worthwhile to recognize that each category may, at one given time, have their own different, or even opposing, outlooks.
If you review the long-term performance of the overall stock market since that Aug. 2008 article, broken up into three time periods, you will see that
a) stocks indeed fell sharply after that starting date over the following 7+ months, making short-term purchases at that time unwise.
b) However, stocks subsequently entered a long-term bull market in March 2009, making purchases made over approximately the following 5 to 6 years a good decision.
c) Since May 2015, most categories of stocks have generally gone negative with the result that any purchases over the last year and a half have generally shown no virtually gains.
Given the strong gains achieved during those periods of positive signals, that is, since the initial positive signals in Oct. 2008 followed by the outright buy signals in Nov. 2009, following them as a selective guide as to when to make routine purchases or even additional purchases proved to be of great advantage to me personally, and hopefully, for anyone who was reading my Newsletters over those years and/or through the latter part of 2013 and saw enough merit in my approach to follow its recommendations too.
However, the recent reduce/sell signals haven't shown as clear cut a result. True, the recommendations starting in Oct. '13 to reduce exposure to certain categories of stock funds including small caps, emerging markets, and international stocks have generally proven accurate. However, while larger US stocks, haven't gained any ground in the last year and a half, they probably have gained sufficiently in the last 2 1/2 years or so to justify having just held them, or even purchased and held them starting near the beginning of the period. So perhaps not enough time has elapsed since the issuance of the mid-Oct. 2013 reduce/sell signal to fully evaluate its true effectiveness, since the signal suggests that buying or holding for up to five years from the onset of the signal might not lead to particularly good returns.
Some Further Observations
It appears that according to criteria used to create my aforementioned Aug. 2008 decision-assisting tool, exceptional buying opportunities for the overall stock market, such as the one that my research indicated began in Nov. 2009, do not emerge all that often, but when they do, they may persist for a number of years.
The same appears true as to when to reduce or sell your stock position, although since the market has an upward bias more often than not, recommendations to sell would tend to have a somewhat shorter window.
As a result, the tool tends to make a recommendation of hold for any given category of fund more often than not. For the majority of the time, then, a recommendation to merely hold an existing position, or, if you are considering new purchases, buying and then holding that position, appear to be the strategy likely to do better than either buying or selling aggressively without an awfully good reason. Such a reason might include, among others, positive buy or hold signals, or negative reduce/sell signals emanating from the tool.
If true, this would appear to essentially confirm watchful waiting or buying and holding, although somewhat modified to suggest that at certain key, but infrequent junctures, one should be ready to
a) take advantage of even better opportunities to profit from the enhanced prospects presumably laying ahead, or,
b) to lighten up during periods expected to show underperformance, since such periods have always been part and parcel of how the world of fund investing operates.
While some might contend that this might appear not to be much more than common sense for any well-informed investor, my tool's strict quantitative and research-based construction likely enables it to "add value" by using past performance data to suggest when, and to what extent, the best and worst opportunities might appear, employing the underlying premises that stocks typically:
- do the absolute best when bouncing back from severe underperformance, and
- tend to fall upon achieving year after year of what appears to become unsustainable levels.
Approaches My Research Suggests An Investor Might Want to Consider Now
Given that the overall stock market, as measured by my above Aug. 2008 tool, shows that it is currently a hold (although not for all categories of stock funds), an investor might consider any or all of the strategies listed below. The tool actually produces a range of scores within a given designation of buy, sell, or hold. Scores, for example, can range from what I call "strong holds" to "weak holds."
Within today's overall market, as well as for most fund categories, scores mostly fall within the weak range of the hold designation. As a result, it would not take too much further a slippage in fund outlook to push these categories slightly further down on the tool's measurement scale. In other words, such could consequently push them once again into the reduce/sell designation.
a. Hold off on all further purchases of stocks, even regular automatic purchases such as through a 401(k). Your objective is to earmark such withheld money for the eventual purchase of stocks, awaiting better buying opportunities. This would mean that even if you believe that your allocation to stocks should hover around a fixed percentage, such as 60% of your investments, you might plan to reduce that percent temporarily. However, since it may literally take years before the tool registers buy once again, this strategy may be prove to be too extreme to be effective. Also on the flip side, it should be noted that even if any stock returns aren't particularly noteworthy, they may still be worthwhile if they exceed the returns achieved in either bonds or cash.
b. It may make more sense to merely partially lower the amount of any further purchases that you were already intending to make, such as reducing your regular percentage allocation to stocks in your 401(k) or any other lump sum investment you were planning to make.
c. You could continue to make scheduled purchases as before, unless or until there is a new signal that the overall market has indeed become a reduce/sell, or even eventually, a buy. How would you know if that happened? While I'm still not willing to provide others with direct access to the use of my buy/reduce/hold tool, be assured that such changes will be reported on my web site, or in some cases, sent out as an Alert email to all current subscribers.
d. Rather than cutting your purchases to all stock categories, you could instead switch some or all of your new purchases to stock fund categories that my tool shows have become buys, such as energy funds right now, or at least strong holds, such as emerging Markets.
Of course, similar to a "multiple choice test," none of the above may be your chosen course of action; that is, many may choose to continue to use watchful waiting or just continue their prior planned regular purchases as discussed above.
While I cannot guarantee that any of choices a) through d) will yield improved results, history, both as incorporated into my 2008 tool and as shown since then, would appear to suggest that you will likely wind up better off. On the other hand, I do understand that not everyone will want to manage their stock investments based primarily on how stock funds have for decades reliably acted in the past, but are not always 100% assured of acting like in the future. But that's how I'm proceeding with my own money.