Fisher Investments Editorial Staff
US Economy, Investor Sentiment

Ignoring the Itch

By, 11/04/2009

Story Highlights:


  • When the market hiccups, "prudence" counsels action. But few actions really are prudent early in a bull market—save being fully along for the ride.
  • Maybe staying in stocks appeals, but not before locking in some profits. After transaction costs and time out of the market, gains may be minimal to nonexistent.
  • A cool head in bull markets is the most highly profitable long-term investing strategy of them all.



Is recent market turbulence making you jittery? Like quadruple espresso and nothing to do jittery? If so, you're not alone. And that's an amazing thing, considering global stocks are just a few percent off one of the biggest, fastest rallies in history. Not to mention today's losses are small fry compared to the huge negative days of a year past. This year's gains are textbook typical of how bull markets begin, yet the fears won't abate.


So when the market hiccups, "prudence" counsels action—any action. Actionable strategies abound. But few strategies are good strategies early in a bull market, save being fully along for the ride.


Shifting asset allocation can be tempting. Maybe we don't have to tell you short-term bets via shorts and options are very risky (outside an extended bear market). But don't be fooled by cash or bonds either—"safe" allocations are bets too. If the risk of "safe" investments is missed stock returns, history says it's a big one. Stocks outperform virtually every other similarly liquid investment in the long term—especially during bull markets. For an investor with a long time horizon and growth on their agenda, missing bulls is ultimately costlier than missing bears, which fall just -39% over 21 months on average. And if bull markets last an average 57 months and gain +165%, the odds are against an extended downturn right now.*


Let's say you know all that, but just want to "lock in" profits. Truth is, there's no such thing. Unless they're spent, "profits" will need to be reinvested. If not in cash or bonds, they'll end up in stocks again—and if you didn't already own what you thought were the "best" stocks, then what have you been up to? Why the change now?


A plethora of strategies counsel how to choose and sell stocks. For instance, maybe now's the time to give a little extra to your portfolio's losers. After paying for commissions and time out of the market while executing your strategy—what do you get in return? A few of your new bets gain ground; likely, others don't. A stock's underperformance doesn't guarantee it has any extra oomph hiding just below the surface; and a big winner's run doesn't mean there can't be more to come.


Stocks are non-serially correlated—a statistician's way of saying a stock's price movement yesterday or a week or a year ago doesn't tell you anything about what happens today or tomorrow. It's true for individual stocks and also the whole stock market. This year's big run up doesn't necessarily portend some "regression to the mean." Fact is, rebalancing a portfolio periodically is fine and good, but a full-on buy/sell discipline based solely on past performance is underperformance waiting to happen. (And anyway, if you do believe in mean regression, then stocks are due for an even bigger, gargantuan-sized bull just to "get back to the average," not another big leg down. But we digress.)


Nothing's more detrimental to a portfolio than itchy trigger finger syndrome. Taking action each time the market declines a few percent dilutes returns in the long term. For one, it's nearly impossible to time ultra-short term market moves. Good plays must be extra "right" to overcome transaction costs. And the more moves you make, the more mistakes crop up. As investments compound, even minor misguided deviations in the short run widen exponentially as the days and months stretch into years.


Folks who think in terms of locking in profits—viewing investing as an amalgam of separate transactions instead of their entire portfolio holistically—will have trouble with the idea of opportunity cost. Such investors will watch the market shoot upward and say, "Well, at least I didn't take a loss." But over the long run, minimizing opportunity cost is key to achieving growth goals. At a minimum, you want to capture market-like returns.


If your index finger's burning right now, chew some gum, drink some chamomile tea, take the ol' Cadillac for a spin around the block—sleep on it. A cool head in bull markets is the most highly profitable long-term investing strategy of them all.



* Source: Historical S&P 500 data from Standard and Poor's Index Services. Based on the technical definition that a decline of 20% or more constitutes a bear market.  

*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

Click here to rate this article:

*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.


Get a weekly roundup of our market insights.Sign up for the MarketMinder email newsletter. Learn more.