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Before Bailing On Equities, Answer This One Question

The current economic cycle has lasted longer than almost everyone had anticipated and it’s not difficult rationalizing reasons to lighten up on equities or completely go to cash.  On a daily basis we are bombarded by doom and gloom headlines highlighting a plethora of market uncertainties—tariffs, Brexit, other geopolitical and geo-economic threats, future Fed interest rate actions, company valuations and corporate earnings.  Add on the fact that equities have fully recovered losses from a horrendous fourth quarter and most portfolios are up nicely for the year. In the midst of current market anxieties, it’s easy to make the argument that portfolios have so far achieved what most would consider a pretty good year and it’s time to take money off the table. (Actually, it’s been a great year based on most earlier expectations for 2019.)

Closeup of US dollar currency money banknotes and coins for financial and investment concepts

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That could help explain the massive inflow of cash into money market funds of late, around $95 billion in May alone. By comparison, the flow was negative for the period in each of two previous years and totaled only $20 billion in 2016.

Since it makes little sense to forego equities forever, before bailing even temporarily, an investor needs to answer one very basic question: If I go to cash temporarily, when do I go back into equities?  Most investors don’t have an answer that’s both comfortable and realistic; nor do I.

This isn’t an original thought or column for me.  In the midst of last December’s debacle I wrote a column: “Investing: Don’t Be Your Own Worst Enemy”  that addressed some of the same issues.  Over the years I’ve learned that some themes need continual reinforcement, especially when potential actions are largely driven by anxiety. Behavioral finance teaches us that anxiety that often freezes people in the present forcing their past experiences and intellectual groundings to take a back seat.  During last December I found myself continually reinforcing my unwavering commitment to the fundamentals of asset allocation.

Among the fundamentals I’m referencing is the need for a significant allocation to equities in an asset allocation. Although there are many factors that need to be considered when quantifying what “significant” means, the rare competently-constructed portfolio eschewing equities, truly is an outlier.  Instead there is an extensive body of research supporting equities as the foundation of most asset allocations.  To restate my premise, prior to totally or meaningfully reducing one’s allocation to equities, there needs to be a clearly articulated reentry strategy.

In a 2017 column titled “Worried About Equities? Avoid Your Single Worst Possible Mistake,” I wrote:

“Going to cash is relatively easy, and with short-term hindsight you feel smart, or you feel early.  The larger issue is reentry.  When you pull out of the markets, no reentry point feels safe.  Should the markets continue to rise, the fear of being whipsawed by coming back in at higher prices just before the great fall – which you predicted when exiting – is really scary.  Should your exit be followed by the decline you predicted, you feel that you were right, and rarely have the comfort to reentry, as prices continue to fall.  Very few nail either exit or reentry points correctly with consistency.”

Investing is scary and there’s never a shortage of data to support any and every point of view.  Sticking with one’s target asset allocation during unsettling times isn’t easy, but looking back over the past few years, you’re probably glad you did (or wish you did).  As with most all of finances (and life), you need a plan.  If you are considering temporarily bailing on equities, essentially trying to time the market, consider whether timing your reentry point isn’t even more risky than suffering through a potential market decline.

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