I think this model is over-simplified and not useful. The main problem in my opinion is that it's one sided.
A good question to ask would be what is your label in how you relate to someone else - I think almost no-one would label themselves as a 'Shapeshifter' or 'Hater'. Even if you didn't like someone, you wouldn't say that you are a hater, but you are being rational in your dislike for them.
Another problem this model has is this is just a snapshot within the timeline. Nobody wouldn't be able to decide if someone was (not) a 'Blind' until he finally had disagree with you. All the category discussed in the article cannot be decided until it's too late and simply a hindsight. What could you make use of the model if it wasn't available in advance?
I would just hold it - I have sold most of my index fund holdings in the past 6-9 months and been just holding cash. I don't think stocks have reached the bottom yet, so holding cash at 0% return is still better than negative returns from stocks. Right now, it's about not taking losses. I also don't see the market and economy rebounding quickly after reaching bottom - they will stay flat for a while IMHO
As a counterpoint, I would quote the great John C Bogle: "Never, never get out of the market." [1] Knowing when the market has reached the bottom is not really possible.
During the dot com crash in 2000-2001, investors sold all the way down to the bottom (and lots of them sold at the very bottom), and then they eventually sold all the way up to the peak, when instead they could have just held onto their shares.
Rebalancing doesn't really work. That's another thing Bogle showed us.
Of course, if you need the cash, that's another matter. But then you arguably shouldn't have invested it in the stock market to begin with. If you have a time horizon less than 5 years, the market is just too volatile.
Cash is a market though, just a different market. If you hold cash you're in a particular market, one that has earned significant returns measured against equities this year. (of course, depending on timespan you may want to pick _which_ market you think best)
It's been strange indeed. My highest yielding investment the past couple years was buying a new vehicle. Conventional wisdom says new vehicles are horrible investment, but in this market it's exceeded yields of every single asset in my pretty diverse basket.
In the context of Bogle's statement (and the parent's comment), it was the stock market, specifically index funds.
It goes back to the realization that no investor can predict the peaks or troughs of the market, so getting out of the market is effectively trying to time it. One may be lucky and get out at the peak and then buy back in at the bottom, but on average you will lose money this way.
Not during the last 100 years, for the last 100 years.
The whole point is you have no clue when the bear market will end, and a lot of the recovery happens in the first few days (or sometimes even just the one day) of the new bull market.
Trying to pull in or out means you miss out on the best gain days.
Bogle did extensive analysis on the impact of rebalancing (between stocks and bonds) on historical portfolio returns, and decided that it does not meaningfully increase your returns.
His main argument was rebalancing effectively switches high-returning assets for lower-returning ones. If one part of your portfolio did better than another part, why would you get rid of it just to bring the asset allocation back to your target?
Rebalancing will also generally generate capital gains in taxable accounts. If you're aiming for 60/40, but your stocks are now up and it's 70/30, selling those stocks to bring it back to 60/40 again means you will pay capital gains on whatever you sell.
The data shows you can get better returns by rebalancing weekly, but this is really too much for most investors, unless you use something like M1 where rebalancing is a single button click.
Of course, there's more complexity to this question. The above mostly applies to the accumulation phase. To someone in, or close to, retirement, for example, having a portfolio that's drifted too far into stocks can be a risk.
"His main argument was rebalancing effectively switches high-returning assets for lower-returning ones. If one part of your portfolio did better than another part, why would you get rid of it just to bring the asset allocation back to your target?"
Because of reversion to the mean. Rebalancing should insulate you from weird outcomes like 90% of your money being in GameStop stock then crashing to nothing a week later.
Pretty much every professional fund of fund rebalances, including those by the company Bogle founded. This is weird advice.
Another way to phrase the reply you have already had: because these assets are martingale.
In other words, to the extent good historic performance says anything about future performance, that effect is already priced in. This means you shouldn't hold on to a historically good investment just for that reason -- it's just as likely to be a loser going forward.
If you determined that the amount of risk you're willing to put into equity is 60 %, the only thing that happens if you let it drift up to 70 % is that you increase your exposure to equity higher than you originally intended.
Maybe you have good reason to do that, but historic good performance is not that reason.
> so holding cash at 0% return is still better than negative returns from stocks
holding stocks as they go down in price does not necessarily matter. It only matters at time of sale. Selling an index (or a particular stock or set of stocks) as they go down only to buy them again later is not the right strategy... you're incurring transaction costs at the very least and the fact that you cannot time the market means you'll probably lose out even further.
Hold the index, unless you need the cash flow or forecast that you need more buffer for flexibility and don't want, in the short term, to be penalized for volatile stock prices (e.g. in case you need to sell to service some cash needs).
And if you have the cash, continue to buy the index on the way down. If your view is that the market, over the long term, is the best generator of wealth, then continuing to buy into it is the more rational strategy.
Inaction is sometimes the best action. There are more ways to be dead than being alive.
If you can sell 100 shares today and use that money to buy buy 200 shares in 6 months then you are better off than if you had held 100 shares for that same six months as long as you buy back into the market.
Actually trying to time the market is largely a fools game, but people do get lucky. Or more often realize they shouldn’t try and time the market.
Yah and if I could buy bananas today for $1 and sell them tomorrow for $5 I'd be fairly wealthy. And if my uncle was a monkey and my aunt a banana farmer we'd all be well off.
