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Long running bull and the perils of market timing

As the US bull market enters its 10th year and reaches new record highs, more investors may be tempted to try their hands at market-timing.

However, the reality is that even seasoned investment professionals rarely succeed in consistently choosing the best times to buy or sell stock.

A few years ago, Vanguard's founder Jack Bogle colourfully summed up the difficulty with market-timing.

"Sure," commented Bogle, "it would be great to get out of the market at the high and back in at the low. But in 55 years in the business [at that point], I not only have never met anybody that knew how to do it, I've never met anybody who met anybody that knew how to do it."

Given the long-running US bull market, some investors are inevitably asking themselves (and perhaps their advisers) such questions as:

  • Should I reduce my exposure to shares?

  • Or should I allocate more of my portfolio to shares in anticipation that the market may keep rising?

Fortunately, disciplined investors holding appropriately-diversified, long-term portfolios with exposure across asset classes are much less likely to concern themselves with such market-timing questions.

A portfolio's strategic asset allocation – its targeted exposure to different investment asset classes – should reflect an investor's tolerance to risk and expectations for returns.

Repeated research, including by Vanguard, has shown that a broadly diversified portfolio's strategic asset allocation is the primary driver of its return variability over time. Asset allocation matters much more than the selection of individual investments.

And it is critical for investors to follow a disciplined strategy of periodically rebalancing a portfolio back to its strategic asset allocation. Certainly, rebalancing can seem counter-intuitive, requiring the selling of currently outperforming assets to buy currently underperforming assets.

Yet without periodic rebalancing, a portfolio can become increasingly volatile and risky. Rebalancing should recapture a portfolio's intended risk-and-return characteristics.

One way that some investors help avoid a temptation to time the market and to keep investing is to practice a dollar-cost averaging strategy.

Dollar-cost averaging involves investing the same amount of money into, say, shares or broadly-diversified funds at regular intervals over a long period – whether market prices are up or down.

Investors practising dollar-cost averaging automatically buy more, say, shares when prices are lower and fewer when prices are higher. This averages the purchase prices over the period that an investor keeps investing.

Yet the core benefit of dollar-cost averaging is not so much the price paid for securities; it is the following of a disciplined, non-emotional strategy that is not thrown off course by prevailing market sentiment and temptations to time the market.

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Source: Vanguard September 2018

Written by Robin Bowerman, Head of Corporate Affairs at Vanguard.

Reproduced with permission of Vanguard Investments Australia Ltd
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