The list of “red flags” is growing. Alongside the Russell 2000, earlier in the year we saw internet/networking and social media stocks get destroyed. Now it’s high-yield bonds, semi conductors, and regional banks that has us wondering if this bull’s days are numbered. Given that the S&P 500’s current streak without a 10% correction has now gone over 1,000 days, (the 5th longest streak of all time) it’s perfectly understandable for market participants to grow a bit paranoid.
Whether these warning signs come to fruition or not, the important thing is to have a plan. For the serious investor, you’d be hard pressed to find a strategy that can endure better than a diversified portfolio.
Investing in an asset allocation model with regular rebalances allows you to endure up, down, and sideways markets. Rebalancing is the only strategy on the planet I know of that forces you to buy low and sell high. Being fully invested, financially, mentally, and emotionally in this type of strategy gives you a plan that precludes fear and greed from dominating your decision making.
Rather than guess which asset class is going to perform best (raise your hand if you thought long dated treasuries was the answer for 2014), you own them all. Trim to what has run away and add to what the market has neglected, simple yet powerful. Given that 50% of the time the market is up 10% or more, why would you want to rely on any strategy that doesn’t keep you in the market?
Make no mistake, this is not an “all weather” strategy, a 60/40 portfolio got dinged 34% from October ‘07 to March of ‘09. But if you accept that no strategy works all the time, and you’re ready to stop searching for the holy grail, I recommend you give this some consideration. However, know that this type of investing requires extreme discipline; the courage to not chase bubbles and the fortitude to stick with this strategy even during bear markets. When the market does eventually correct, I have a plan, I recommend you have one as well.