30 Nov Timing the market in today’s climate

Q. Does it make sense to stay away from the market sectors that have been the strongest so far this year? Or are those expected to keep going higher?
— Investor

A. There’s no simple answer for your question. So much depends on your time horizon, your risk tolerance and how these all fit in with your overall portfolio.

If your goal is to invest over the long-term, totally avoiding a sector solely on the basis that it has recently performed well would not be prudent, said Victor Cannillo, founder of Baron Financial Group in Fair Lawn.

He said long-term investors should identify a globally-diversified strategy, spread across many sectors, that is risk appropriate and helps them achieve their goals.

“You want to find the appropriate balance of globally-diversified assets for your portfolio, while producing as little volatility as possible to achieve one’s desired results,” he said.

Then you should look at rebalancing, which means getting out of relative gains from strong performing asset classes to invest the proceeds in non-correlated asset classes that may be underperforming.

“Using a rebalancing strategy can help smooth out volatility in the portfolio’s performance and prevent overweighting to any one sector or asset class while still allowing the investor to remain invested,” Cannillo said. “With this approach, investors can both reap the reward of the recent market surge while simultaneously strengthening the long-term stability of the portfolio by purchasing securities within sectors that may be trading at severe discounts due to their lackluster recent performance.”

Furthermore, Cannillo said, if the sectors that have been performing well recently were to take a severe and unexpected downturn, a rebalancing strategy would assure that the portfolio is not overinvested in the those asset classes and exposed to an unwarranted amount of risk at any given time.

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This post was first published in November 2017.