The Value of Tactical Investing in a Falling Stock Market
When the stock market begins to fall, investors ask, “How do I protect my investment?” it is not as simple as just selling everything and sitting in money market. First, this could trigger long-term or short term capital gains. Second, this market correction could be brief and one would miss the opportunity for future potential gains. In other words, if you are going to try to time the market, you have to be right twice – when you get out and also when you get back in.
People I have talked to about their experience in 2008 have told me that they got out of the market at the wrong time and missed all or most of the gains that followed. It almost takes being clairvoyant – knowing in advance when to get out and when to get back in. I don’t think anyone knows how to do that. And, if you are right this time, you may not be next time. The stock market is a complex place to know how to make money and lower risk at the same time.
The traditional answer is to blend bonds or bond funds with stocks or stock funds. This has worked well for the last 35 years – during a period of falling interest rates. I do not see how the blending of stocks and bonds to lower risk is dealt with in a period of rising interest rates.
The issue is that if interest rates continue to rise, bonds and bond fund prices will fall. What if the stock market falls at the same time? I can find no textbook answers to that question. I have asked financial advisors how they handle this dilemma. I’ve never gotten a good answer. All they know is to tell investors to ride it out. How encouraging is that?
My answer to this dilemma is something I call tactical investing. While there can be no guarantees, tactical investing is an emotionless mathematical way that reacts to specific signals that point to higher market risk. It also reacts to signals that point to potential upturns in the market – all with the goal of minimizing the downside and participating in the upside.
I spent 10,000 hours in research from 2009 to 2014 studying the patterns of 2008 as well as previous crashes. From that research, I built a mathematical model based on historical patterns – designed to potentially minimize downside risk and participate in the upside of the market.
I completely acknowledge that this mathematical model is not perfect. It does not completely eliminate all risk, nor does it capture all of the upside in an upwardly trending market. However, this is the only way I have found that does both to my satisfaction.
Tactical investing is ideal in an IRA, but in certain conditions can also be achieved by tax-deferring gains with taxable money.
Think about tactical investing as a way to potentially moderate downside market risk without compromising upside participation.
Ben Reppond is CEO and Investment Manager of Reppond Investments. Reppond Investments, Inc. is a registered investment adviser in the States of Washington and Montana. We may not transact business in any state where we are not appropriately registered, excluded or exempted from registration. Individual responses to persons that involve either the effecting of transactions in securities or the rendering of personalized investment advice for compensation will not be made without registration or exemption.
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