Physician Asset Advisor, September 2005
By Neil Sosler & Marc Singer
Some say that the stock market is driven by fear and greed. This perception can become a reality for the undisciplined investor. Recent U.S. stock market downturns provoked a “flight” response in many portfolios. The investors’ emotional reactions to market volatility led to liquidation of a large percentage of equity holdings that were then shifted into cash or money market accounts. After side-stepping the market correction, the plan would entail waiting for the market bottom to be reached, and then shifting cash back into equities for the ride to the next market peak.
“Well, Punk, Do You Feel Lucky?” – Clint Eastwood
Is such a market timing strategy likely to succeed? The answer, in a word, is no. In spite of many claims to the contrary, no one has devised an investment algorithm that can consistently and successfully time the stock market. In order to do so, one would have to guess correctly twice in each market cycle - choosing the right time to get out, and then back in to the market. Anyone, expert or novice, may guess right once, a probability of 25%. That also means that there is a 75% chance of missing the mark. In addition, there is the opportunity cost (missed opportunity) of investing in cash vehicles that will tend to exceed market losses over time.
Chasing Returns
An attempt at market timing may result in an even worse scenario for emotional investors. While sitting on the sidelines, they watch as the market rises. With fears of being left behind, they jump back in. Then, after the market drops, they panic and bail out again. Finally, after missing the market’s next upswing, the investor once again buys stocks. This pattern of buying high and selling low does not lead to wealth creation.
Investors no longer have the luxury of being asleep at the wheel.
A Disciplined Investment Strategy is Key
History has shown that a well thought out, disciplined approach to investing is the key to greater wealth. Important considerations include the investor’s objectives, time horizon and risk tolerance. Within this framework, funds should be allocated among major asset classes such as equities and fixed income investments. Within equities, further diversification should be achieved with both growth and value styles, large, mid and small capitalization and foreign stocks. Bonds need to be diversified by quality and duration.
Using Strategic Asset Allocation
This investing involves moving between different sectors of the market in anticipation of growth or devaluation of those areas. In early 2000, it was obvious that large cap growth was overpriced and small cap value was under-valued. The correct strategy involved shifting from one to the other. Currently we feel the international sector offers the highest potential returns. We will cover this more in a future PAA issue.
Conclusions
As your financial assets grow, a good wealth manager should help you develop, implement and monitor a plan tailored to your needs with a long-term perspective that is consistent with your objectives. With today’s volatile markets, it is no longer acceptable for you or your advisor to be asleep at the wheel
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Singer Xenos is an established wealth management firm specializing in physicians with $500,000-plus in investments. We manage over $550 million in assets such as retirement plans, annuities and personal accounts, with an emphasis on wealth building and protection from malpractice claims.
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