Wealth Management Blog | WrapManager | Michael J. O'Connor (11)

Michael J. O'Connor

CWS®, Vice President Investments

The Dangers of Short-Term Market Timing Strategies

Posted by Michael J. O'Connor | CWS®, Vice President Investments

August 31, 2013

As we established in our recent posts “Assessing the Probability of a Stock Market Correction” and “Are There Strategies to Handle Stock Market Corrections?,” market pullbacks are fairly normal occurrences within bull markets. We also pointed out some features that identify stock market corrections - they’re relatively short in duration, vary in size, and perhaps most importantly, they’re unpredictable when it comes to identifying when they’ll start and end.

It’s the last point that makes short-term market timing strategies not only difficult to execute, but also potentially harmful to investors.

Stock Market Corrections Are Unpredictable

With stock market corrections, there are no clear warning signs for when investors should sell out of equities or when it’s time to reinvest. That creates two clear risks to short-term market timing strategies:

An investor sells out of equities in an attempt to time the market correction correctly, but the stock market continues to rise.
An investor might get it right and sell out of equities before a stock market correction, but then it becomes a question of when to reinvest. There is the risk that he or she misses out on the upside of the recovery.

Lazard Asset Management - Time to Invest in Developing Markets?

August 25, 2013

Lazard's Developing Markets equity team explains why they are excited about their growth-at-a-reasonable-price philosophy in developing markets. "We think this phenomenon of paying a high premium for perceived stable growth is a reaction to the global financial crisis that has led many investors to anticipate another large shock to the global economy even as central banks have worked to reduce that risk. This bias could persist but should fade as any of the following begin to occur..." Download Lazard Asset Management's Full Commentary Here Get Free Research Reports on Lazard Asset Management [+] Read More

Are There Strategies to Handle Stock Market Corrections?

August 24, 2013

In our recent piece “Assessing the Probability of a Stock Market Correction,” we explained the nature of corrections and examined the probability of a stock market correction occurring this year. We concluded we would not be surprised if a stock market correction occurred sometime in the future. Is there something that investors could or should do to prepare for the possibility of a stock market correction? Is There a Way to Avoid the Downside of a Market Correction? Given that stock market corrections are normal in a healthy market but unpredictable and short in nature, it’s nearly impossible to time it correctly. However, one strategy to avoid locking-in the downside of a market correction would be to remain invested throughout the correction. Below is a chart of the S&P 500 similar to the one we used in our “Assessing the Probability of a Stock Market Correction” piece, which illustrates the performance of the S&P 5001 from December 31, 2010 – August 14, 2013 (Click on the chart for a larger version): [+] Read More

Assessing the Probability of a Stock Market Correction

August 21, 2013

The run-up in stocks this year has been quite compelling so far. The S&P 500 is up +19.7% on the year as of August 51, and global stocks as measured by the MSCI World Index aren’t far behind at +14.34%.2 This strong performance has many investors asking: what is the probability of a stock market correction occurring sometime soon? Are there strategies to handle market corrections? Should I take some profits now as a short-term market timing strategy, so as to avoid any downside of a market correction? In a series of posts on stock market corrections, we’ll address these questions one at a time. What is the Probability of a Stock Market Correction Sometime Soon? Stock market corrections are normal occurrences in the markets. In fact, over the last 33 years the average intra-year decline for the S&P 500 is -14.7%.3 Using history as a guide offers some insight into a few examples of past stock market corrections (click on the chart for a larger version): [+] Read More

Domestic vs International Stocks in Portfolio Diversification Strategy

August 13, 2013

US stocks have been outperforming international stocks for nearly all of the current bull market. From March 9, 2009 – August 5, 2013, the S&P 500 (SPY) has risen 124.34% compared to just 76.32% for the rest of the world (MSCI All Country World Index ex-United States: CWI). It follows that if you have a globally diversified portfolio, you may have noticed your US stocks outperforming your international holdings recently. Considering that Europe is still in the mire and China is showing signs of slowing, it’s possible this trend could continue. Would it be wise, then, to move some money away from your international equity strategy and rebalance towards a more US-based strategy? Before diving into that question, it’s important to consider how one should approach constructing an appropriate portfolio. Investing isn’t about putting all your money in the best performing asset class so as to generate the highest returns. This would likely result in a very concentrated and risky portfolio diversification strategy. Instead, since investors don’t know which sector, country, or category will outperform moving forward, it’s important to consider having exposure to various sectors and countries as part of a well-diversified portfolio. [+] Read More

Is the Eurozone Recession Ending? - The Wrap

August 13, 2013

WrapManager’s Weekly Summary of Market and Economic News Eurozone Recession Showing Signs of Ending In a sign the eurozone recession may finally be over, Germany posted robust 3.8% growth in factory orders from May this week, far outstripping estimates for 1.1% growth and marking the best growth in 8 months. Italy added good news into the mix as well, in reporting that their GDP fell by only 0.2% in the second quarter, versus a 0.4% expected contraction. They’re inching towards positive GDP growth, as their GDP in the first quarter was -0.6%. Economic activity is picking up.1 The UK Reporting Strong Numbers in Services and Retail The UK is also seeing a nice economic boost. The services sector expanded last month at its fastest pace in more than six and a half years, and retail sales also posted strong gains as total sales grew 3.6% in July, marking the best July growth since 2006.3 [+] Read More

Louis Navellier - Positive GDP Report Trumps "Mixed" Jobs Report

August 9, 2013

Will the Fed continue the quantitative easing program, and who will replace Ben Bernanke? Louis Navellier answers these questions and more. [+] Read More

Nuveen Asset Management - Equities Grind Higher

August 8, 2013

Should you overweight or underweight your portfolio to equities? Nuveen's Chief Equity Strategist Bob Doll answers with his thoughts. [+] Read More

Rising Interest Rates? How We Got Here

July 29, 2013

In response to the 2008-2009 financial crisis and global recession, the Federal Reserve (Fed) and other central banks across the world lowered interest rates and implemented asset purchase programs meant to drive down borrowing costs for banks and consumers. What is the Federal Reserve Trying to Accomplish? It works in two ways. First, by lowering short-term interest rates, the Fed and other central banks give traditional banks easier access to cheap capital, which policymakers hope will spur economic activity by increasing the amount of loans banks make to businesses and consumers. Second, the asset purchase programs, which are referred to here in the US1 as “quantitative easing,” has the Fed currently purchasing $85 billion per month of securities - divided between mortgage-backed securities and Treasury securities.i This serves two main purposes: [+] Read More