Investors are probably better off leaving their investment strategy alone right now.
In the game of craps, seven is the most likely number to be rolled. After that it’s six and eight. The least likely numbers are two and 12. The farther away from the number seven you get, the less likely that number is to appear.
The thing that most people seem to forget is that each roll is independent of the previous, no matter what superstitions exist. If you roll a two, and roll again, the fact that you just rolled a two has nothing to do with the fact that your next roll could be a two again.
This is kind of like the market—just because it has doubled from the bottom does not mean it is going to pull back or keep going up for that matter.
It has been almost two months since I wrote about missing the doubling of the S&P 500 off the March 2009 low, which marked the quickest doubling of that index since 1936.
My point was that I was not sure if most individual investors actually participated in the doubling of the S&P 500. Simple indexing, eschewed by most active managers, may have almost doubled returns for investors that were actually in the market. Not a bad result.
Over the past few years, I suspect many people flew by the seat of their pants with an undisciplined investment strategy, trying to do everything imaginable to avoid losses, and then trade the market on the way up. Or worse, they sold and went to cash waiting for the market to turn around to get back in. They were worried that because they rolled a two, they were going to roll a two again.
But what about those who were disciplined through the crisis and recovery? What should be done now that the market has regained its losses? It’s as if investors are worried that because they just rolled a winning number on the craps table, they cannot roll another winner. Investors are wondering if they should take their gains off the table. They want to know, “What should I do now?”
Well, I’m going to answer that question with a few of my own. Has your personal situation changed? Do you have a new need for liquidity that requires access to cash? Does your financial plan dictate a change to your asset allocation? If you take profits, are you planning to reinvest that cash and if so, in what?
Depending on your answers, there could be a good reason to take some profits and raise cash. Reasons could include pending retirement, loss of a job, buying a home, or that your financial plan calls for a reallocation of assets based on some benchmark such as age.
It’s also very likely that the answer may be pretty straight forward if not downright simple: Do nothing.
If you don’t need the cash, what would you do with it? If you take money out of the equity market, would you keep it in cash earning less than 1 percent? How about bonds? They will lose value as interest rates rise. While blanket advice is not applicable to every situation, unless you have a need or plan for the cash, you are probably better off leaving your investment strategy alone right now.
Unlike craps, we have economic information that can help us make educated and insightful decisions over the long term. Right now, corporate revenue and profits are coming in nicely for the first quarter. That’s a good sign.
For you craps players, you are holding a six or an eight.
David B. Armstrong , CFA, is a managing director and cofounder of Monument Wealth Management in Alexandria, Va., a full-service wealth management firm. Monument Wealth Management is backed by LPL Financial, the independent broker-dealer and Registered Investment Advisor. David has been named one of America’s Top 100 Financial Advisors for two straight years by Registered Rep Magazine (2009 and 2010 based on assets under management) and has been interviewed by several national media sources over the past several years. David and Monument Wealth Management can be followed on their blog Off The Wall, their Twitter accounts @MonumentWealth and @DavidBArmstrong, and on their Facebook page. Securities and financial planning offered through LPL Financial, Member FINRA/SIPC.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendation for individual. To determine which investment is appropriate please consult your financial advisor prior to investing. All performance references are historical and are not a guarantee of future results. Asset allocation does not ensure a profit or protect against a loss.
Corrected 5/2/2011: A previous version of this article incorrectly stated the S&P 500 Index low.