A good financial plan tells you what to do no matter what the market does
One of the most important investment resolutions for 2023 is to actually follow your financial plan. There are no exceptions.
And if you don’t have a plan that outlines how you will react to every possible situation, another important solution is to devise such a plan as soon as possible.
The last thing you want to do is spend another year reacting to what the market throws at the way we do things. be connected.
Read: 6 New Year’s Resolutions for Retirement: Back to Basics
Many admit that this is the case during a bull market where most deviations from a fully invested state lead to market lag. I think.
They are wrong, as you can see from the attached chart. It plots the average recommended equity exposure for short-term market timers as measured by the Hulbert Stock Newsletter Sentiment Index (HSNSI). Note that the average market timer became bullish when the market rose and bearish when the market fell. This is the essence of closing the barn door after the horse has left.
Consider the highest average equity exposure level for 2022, which occurred on January 4th, one day after the bull market high. The lowest average exposure level he had occurred on Oct. 12, which was one day before he closed on the stock market’s all-year low. In other words, the typical market timer is most bullish when he should be bearish, and vice versa.
Additionally, note that this pattern can be seen in professional market timers. Individual retail investors tend to be more reactive than professionals.
long term pattern
Moreover, last year’s experience was no exception. Consider the data in the table below. This reflects the stock market reaction after the HSNSI hit its highest 10% and lowest 10% since 2000. Note that the stock market, on average, performs much better following the lowest decile of the HSNSI measure than following the highest decile. (These differences are significant at the 95% confidence level, which is often used by statisticians to determine if a pattern is real.)
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’s Included in Your Financial Plan
Financial planning is multifaceted and considering all the issues that need to be addressed is beyond the scope of this column. But as 2022 draws to a close, one aspect is particularly important.
In asking this question, I am not predicting the end of the bear market. No one knows if it’s over or if there’s still a long way to go, so it’s important to ask precisely. What is certain, however, is that a recovery in equity exposure cannot wait until the market “feels right”. That way, equity exposure levels won’t fully recover until near the top of the next bull market. In other words, when it’s too late.
Instead, the plan should specify the steps and timing for reinvesting cash. One possible plan he used as an example in this summer’s column is to determine how much the current equity level is below the desired (or target) level of exposure, and then divide the shortfall into five segments. Start by splitting into . Every time the stock market rises or falls by 5% from its current state, invest in one segment now and each of his four remaining segments.
We can’t pick the exact bottom, but it’s better to follow such a plan than wait until the market feels right. By the time the market returns to previous bull market highs, the stock’s exposure level will recover and the average purchase price will be lower than that high.
Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee for audits. You can contact him at email@example.com.
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