Investors should tread carefully on warnings over share price risk

Warnings from market heavyweights balanced by difficulty timing exit and re-entry

From 1988 to 2013, an initial investment of $10,000 in the market, left to its own devices, increased to $128,952, using Vanguard Group’s online tool. Photograph: Martin Leissl/Bloomberg
From 1988 to 2013, an initial investment of $10,000 in the market, left to its own devices, increased to $128,952, using Vanguard Group’s online tool. Photograph: Martin Leissl/Bloomberg

It isn't easy to fly in the face of a 3G force. Jeffrey Gundlach, Goldman Sachs, and Bill Gross have all sounded warning signals – okay, fire alarms – about rising risks in stocks and bonds.

There are also seasonal reasons to beware of stocks around now. Even Donald Trump is urging you to avoid stocks. The thing is, market timing is tricky – and dangerous. There have been scores of stories with such statistics as how "if you had missed the 90 best-performing days of the stock market from 1963 to 2004, your average annual return would have dropped from about 11 per cent to a little more than 3 per cent".

Rebound

Part of the issue is that after you sell, you have to decide when to buy back in. Skittish investors tend to sit on cash and miss most of any rebound. And if you do sell, where are you going to put that money, outside of cash?

If you are tempted to jump out of the market, there are interactive tools, and one fun game, that can give you a sense of the effect on your returns if you time it right – or wrong.

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With Vanguard Group’s tool you can see how a $10,000 investment would do if you moved out of the S&P 500 after a certain per cent drop in your balance and got back in after a certain per cent rebound in the market. The time frame for the tool is from 1988 to 2013.

Say you chose a 50 per cent drop, since Warren Buffett has said you shouldn’t be in stocks if you’d be in acute distress to see your portfolio fall 50 per cent. And say you chose 20 per cent for when you’d buy back into a rebound. From 1988 to 2013, an initial investment of $10,000 in the market, left to its own devices, increased to $128,952. The $10,000 that jumped in and out of the market rose to $106,478, for a gap of about $22,500.

On robo-adviser Betterment’s site,you can find a tool that shows the percentage of gains or losses over different investment periods in the S&P 500. You choose the investment period with a slider to see how time in the market can affect the likelihood of gains or losses.

You can’t target a point at which you’d sell or get back in, but you can see how 72.8 per cent of the 21,523 investment periods lasting 11 months resulted in gains for the 500-stock index, for example, and how 87.4 per cent of 20,904 investment periods lasting five years showed gains.

Dialling back risk

There are legitimate reasons to tweak equity holdings now, or at any time. If your asset allocation isn’t automatically adjusted by a robo-adviser and you haven’t looked at it for a while, your stake in stocks may be higher than you realise. That makes dialling back on risk reasonable. And if you need money that’s now in stocks for a down-payment on a house or some other large expense in the not-too-distant future, moving that stake into cash is smart.

Otherwise, beware of your itchy fingers. If you can live through temporary, sometimes dramatic drops in the broad stock market, in the long run it may still be the best place for your money. – (Bloomberg)