One of the most important investment resolutions for 2023 would be to actually follow your financial plan—no exceptions.
And if you don’t have a plan that outlines how to react to all possible situations, then another crucial resolution would be to devise such a plan ASAP.
What you most definitely don’t want to do is spend another year merely reacting to what the markets throw our way. That approach, which is all too common, usually leads to disappointing results—buying when you should be selling, and selling when you should be buying.
Many concede that this is the case during bull markets, when most deviations from a fully-invested posture result in lagging the market. But they believe the situation is different during bear markets—such as this past year.
They’re wrong, as you can see from the accompanying chart. It plots the average recommended equity exposure among short-term market timers, as measured by the Hulbert Stock Newsletter Sentiment Index (HSNSI). Notice that the average market timer became more bullish as the market rose and more bearish as the market fell. This is the very essence of closing the barn door after the horses have left.
Consider the highest average equity exposure level in 2022, which occurred on Jan. 4—one day after the bull market’s high. The average exposure level’s lowest reading occurred on Oct. 12, which came one day before the overall stock market’s closing low for the year. In other words, the typical market timer was most bullish when he should have been bearish—and vice versa.
Note carefully, furthermore, that this pattern emerges among professional market timers. Individual retail investors are even more prone than professionals to be reactive.
Last year’s experience is not an exception, furthermore. Consider the data in the table below, which reflects the stock market’s reaction since 2000 in the wake of the 10% of highest HSNSI readings and the 10% of lowest. Notice that the stock market, on average, performs significantly better following the lowest decile of HSNSI readings than in the wake of the highest decile of readings. (These differences are significant at the 95% confidence level that statisticians often use when determining if a pattern is genuine.)
|Average S&P 500 return over subsequent month||Average S&P 500 return over subsequent quarter||Average S&P 500 return over subsequent 6 months||Average S&P 500 return over subsequent year|
|Subsequent to 10% of lowest HSNSI readings||+1.6%||+2.5%||+4.4%||+11.0%|
|Subsequent to 10% of highest HSNSI readings||-0.1%||-0.6%||+2.3%||+6.0%|
What a financial plan includes
A financial plan is multifaceted, and it’s beyond the scope of this column to review all issues it should address. But there’s one aspect that is especially relevant as 2022 comes to a close: How will you go about restoring your target equity exposure?
In asking this question, I am not predicting that the bear market has come to a close. It’s important to ask precisely because no one knows whether it is over or whether it has much further to go. But what is certain is that restoring your equity exposure can’t wait until the market “feels” right. If you do that, your equity exposure level won’t be fully restored until we’re close to the top of the next bull market. When it’s too late, in other words.
Instead, your plan should specify the steps you will take to reinvest your cash, and when. One possible plan, which I used as an illustration in a column this summer, starts with determining how much your current equity exposure level is below your desired (or target) level, and then dividing the shortfall into five segments. Invest one segment now, and invest each of the remaining four, in turn, whenever the stock market rises or falls 5% from where it stands today.
While you won’t pick the exact bottom, you will be better off following such a plan than waiting until the market feels right. You will have restored your equity exposure level by the time the market is back to its previous bull market high, and your average buy price will be lower than where it stood at that high.
Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at firstname.lastname@example.org.