Missed the big market rally? Here’s what to do now.
Barry Ritholtz,
Washington Post June 14 2013



So, you missed the big market rally. U.S. stocks have moved nearly 150 percent since the March 2009 lows, and you sat out most of those gains.

I’ve heard all the reasons: Maybe you jumped out of stocks in 2008 and stayed out. Perhaps you were in at the lows, but after the first 20 percent advance, you lost your nerve. The Flash Crash of May 2010 sent you running for cover? Or was it the 19 percent drop before QE2 was announced in August 2010?

There’s always some reason that looked good at the time. The asset management business, it turns out, involves a lot more behavioral counseling than you might guess. In any case, the markets have powered upward and onward without you.

What do you do now? How to begin to repair the damage?

It is a two-part process: The initial steps are designed to help you overcome your risk aversion — the emotional aspects of investing. Call it your “erroneous behavioral economic zone.” After we fix that big underutilized brain of yours, we can move on to the investment steps that allow you to work your way back into markets.

1 Acknowledge the error: First thing you need to do is own up to the mistake. No, this wasn’t the fault of the Fed or President Obama or some algorithm trading server somewhere in New Jersey. It is your portfolio, your retirement account, your future. You cannot fix it if you are still blaming everyone else. (I find that tracking my blunders in annual mea culpas to be helpful).

2 Stop beating yourself up: This market has confounded amateurs and pros alike. Unless you came to an early understanding of how the Fed has been driving liquidity and, therefore, equities, it was easy to miss. As we noted last month, even the supposed best and brightest hedge fund managers have stunk up the joint. Give yourself a break, and move on.

3 Change your sources: Most of the people I speak with who have missed this huge move have been consuming a diet of doom and gloom. If you think that it doesn’t affect you, you’re kidding yourself. Constantly reading about hyperinflation and the collapse of the dollar and the end of the United States as a world power and the student loan crisis and omigod Obamacare is going to crush America and the Chinese are taking over the world and . . . STOP! Right now.

It is recession porn, a focus on the negative that is a leftover effect of the crash and great recession.

Go through your bookmarks, and delete all of these sites: the goldbugs, the end-of-worlders, the doom-and-gloomers, the outraged Fed critics, the Obama haters. They all have agendas that typically have to do with selling you subscriptions or advertising. They are not at all concerned with your returns, your portfolio or your retirement.

4 Review your process: Now that you have eliminated the crazies, look at the rest of your process. How do you make investment decisions? Are you careening from stock pick to stock pick, after watching too much financial TV? Do you even have a process?

Whatever it is you have been doing obviously has not been working. It is likely you are missing two important components of an investment plan: the plan itself and an error-correction method that allows you to reverse the inevitable mistakes that will occur.

5 Create an asset-allocation model: Of course, if you missed the entire rally, you don’t have much of a plan. You need a full-blown investment strategy.

Own five to nine broad indexes, typically in exchange-traded funds (ETFs) or low-cost mutual funds. In decreasing amounts (35 percent, 30 percent, 20 percent, 5 percent), you should own: large caps, small caps, emerging markets, global equities, technology, real estate, bonds (corporates, Treasurys, munis) and commodity indices.

This is your asset allocation model. And here’s what to do with it:

6 Deploy your capital: You need to make your capital work for you, not sit in cash. Deploy this capital based on time, on market levels, on a model or any objective metric, just so long as it is not driven by your gut instinct.

When it comes to investing, your emotions will betray you every time, sending you running in the wrong direction and at the worst possible moment. Using a framework of entries that are objectively derived overcomes this risk-aversion problem.

7 Dollar-cost average: You can allow time to work in your favor by deploying your capital in 12 monthly (or four quarterly) equal amounts. This avoids the classic market timing issue, and allows any market volatility to work in your favor. The other advantage is that if the market runs away to the upside before you fully deploy, you at least have some exposure, and you are averaging up into the rally.

Historically, the math works better with lump-sum investing, but understand that this strategy is about emotions, not numbers.

An alternative is to use purchase points based on market levels: Set a series of levels in 5 or 10 percent increments above and below where your favorite index (Dow, Russell, etc.) is today. With each market move, up or down, deploy another 10 or 20 percent of your capital to the equity side (decide this in advance, or you will mess it up). If the market gets cut in half, you are fully invested in equities at enormously advantaged prices. This sounds great in theory, but the reality is that when markets are at their cheapest, they also look their scariest. Very few people have the discipline to make buys into the mess.

8 Rebalance regularly: You now have a simple model with various asset classes held in different weightings (35 percent to 5 percent). Over time, some will do better or worse than others. Eventually, the model drifts. The process of returning the portfolio to its original percentage weightings is called rebalancing.

Plan on rebalancing regularly — quarterly for larger portfolios of more than $1 million, semiannually for mid-size and annually for accounts less than $100,000.

What this means in practice is that as any asset class gets expensive or cheap, you get to make small, advantageous shifts. You buy a little of what has become cheap and sell a bit of what has become dear.

The academic data show this creates about 1 percent in additional performance over longer investment cycles. It doesn’t cost anything and adds no extra risk. It is the closest thing to a free lunch that exists in finance.

9 Be diversified: We own stocks and bonds and real estate and commodities (pretty much in that order). When one market or asset class is falling, others tend to go in the opposite direction. We also own a broad variety of equities: There is geographic variation, differing market-capitalization sizes and economic sectors. Diversification usually means that different asset classes behave differently. When equities get shellacked (like this past week), bonds tend to rally. (It was reversed last month: Stocks rallied, bonds sold off).

A balanced portfolio approach tends to underperform markets on the way up but suffer much less on the way down. The goal is to allow you to pursue your financial goals but still sleep at night.

10 Understand your time line: People have a foolish tendency to lose sight of the long term in the midst of the day-to-day noise.

Most of you have an investing timeline between 10 to 40 years. (If you plan to start withdrawing money to live on in 10 years or less, you will need to be more conservative). But those of you in your 20s, 30s, 40s or even early 50s have a much longer time horizon. Secular (or long-term) bear markets are to be expected, and they let you buy advantageously if you can overcome your own instincts. Volatility and short-term market swings are part of the nature of markets.

When your investing timeline is measured in decades, you cannot afford to continually miss an ongoing rally because of day-to-day volatility.

Markets that rally 150 percent come along once a generation. If you missed this one, it is probably because you based your investing on some form of guess as to what stocks were going to do. Experience teaches us that we are all pretty bad at making forecasts nearly all of the time. This is why any prediction-based investment strategy is doomed to failure. The outcome is binary: Your guesses are either right or wrong.

Consider instead a probability-based investment approach. The idea behind asset allocation is to allow mean reversion, rebalancing and diversification to work in your favor. No guesswork required.


Ritholtz is CEO of FusionIQ, a quantitative research firm. He is the author of “Bailout Nation” and runs a finance blog, the Big Picture. Follow him @Ritholtz.

Category: Apprenticed Investor, Investing, Psychology

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

28 Responses to “Missed the big market rally? Here’s what to do now.”

  1. And if you have a 10-20 year time horizon, you should not care about any 1 or 2% moves

    • rd says:

      Was it a mistake when I went to all cash on Thursday?

      I think Bernanke has accomplished some of his goal when he flushed out a bunch of weak hands in the market this week. He probably has memories of Alan Greenspan’s “irrational exuberance” speech that was followed up by a massive stock market bubble.

      • The question isn’t if you got it right one day.

        Rather the issue for most investors is how much upside did they (or you) miss waiting to avoid that down 2.5% (or worse) days

        And seriously, do you believe you can consistently jump in and out of the market timed well enough to make up for costs & taxes?
        You know the answer to that one — even without short term taxes or commissions

  2. MayorQuimby says:

    I urge extreme caution to longs right now – today. That includes you, Barry.

  3. BennyProfane says:

    I know that you rarely, if ever, speak about physical real estate as a component of a portfolio, but, I’m afraid that I have to be a doom and gloomer still about that market. There seems to be a lot of people getting sucked into that eddy, chasing what they think will be much higher yields than other investments. In a few years, I predict that you may hearing about a lot of people who were very dissatisfied about their returns, and, probably, losses, but, at the same time, stuck with a very illiquid asset.

    • I was referring to REITs and other real estate trading vehivles — not physical RE

      • BennyProfane says:

        I know. I’m talking about all of those people (besides the hedgies and private equity groups) who are buying up homes and other properties to become landlords. It must be so tempting, on paper. I suspect there are many who still have the RE bug.

  4. seneca says:

    Since large moves in broad asset categories like emerging markets or commodities tend to run for several years, it seems reasonable that you’ll get higher returns by rebalancing every 1.5 to 3 years instead of every quarter. Does anyone have evidence that rebalancing every quarter is better than using a much longer period?

    • There are actually several different software programs that can tell you the precisely optimized rebalancing times relative to your asset mix, portfolio size and even tax sensitivity.

      We use iRebal from TD. It used to be VERY expensive and now became free

  5. Bob is still unemployed   says:

    “… Most of the people I speak with who have missed this huge move have been consuming a diet of doom and gloom….Go through your bookmarks, and delete all of these sites: ….”

    Most excellent advice. There’s one site that I started visiting circa early 2008. At the time I thought the site to be rather insightful. Then over the next couple three years I noticed the site was really permanently pessimistic on nearly everything. That tone worked when things were on the way down, but when things started to turn around, the constant pessimism stopped making sense (sorry, can’t resist the trailer).

    A few months ago I realized that insight was forward-looking, and not merely narrating and spinning current occurrences. So I removed the bookmark for that perma-pessimist site, and I haven’t looked back.

  6. catman says:

    I thought this post might be a put on. Love #3. For example when I hear the words paper silver and physical silver in the same sentence I lash myself to the mast.

  7. leopardtrader says:

    The market is in constant movement. Each month/Qtr/Yr a new long term top or bottom is born. There is no reason for anyone to keep lamenting/moaning on misses. rather look forward as there are plenty fishes if you are humble, look clearly & factually. This week new opportunity here again. SNP will probably get to 2500 by mid/end 2014. Emerging markets have great value at this time and high yielding large capitalized stocks to resume another leg of rally as money creep out of bond markets. See my assessment here http://leopardtrader.com/?page_id=1714

  8. sellstop says:

    Read the stuff from Investors Business Daily. The book they sell by the author is actually quite good. I studied the markets for years and then came across the book and found it to be a synopsis of all that I had ferreted out about trading and investing. If you want to put in the time and study it is very possible to beat the averages. It takes about 10 yrs of study and practice and a willingness to keep looking inside at your own emotions while you trade and study the masters of trading. Then it is possible. It basically comes down to money management and knowing when to be in the markets and when to be out of the markets.
    Looking over my bookshelf…… “How to make Money in Stocks” by O’neil….

    • How to Make Money In Stocks is a good primer on stock screening (CAN-SLIM) and active trading, but that is also its weakness. The best takeaway of the book (at least for me) was is its systematic approach to investing.

      Some of the critics of the book point out:
      -there is no bonfide evidence that validates the success of CANSLIM
      -Claims “no original or thorough research on price pattern analysis has been done in the last 78 years” a wildly false statement;
      -Its dated, fails to understand that NASDAQ gained exchange status in 2006.
      -Claims “Anyone can learn to invest wisely with this bestselling investment system!” is a broad overstatement

  9. victor says:

    BR: a few years ago you opined that the market would likely fluctuate until 2014 when a new secular bull market would emerge. Still stand by that?

    There was no big rally missed by those investors who stayed the course throughout the market swoon from 2007 to 2009 and then watched unperturbed the market recover to the last high and then (a little) some. I´m talking about the investors who in 2007 were positioned for the next 20 years plus.

    • The line I have been using for a long time was: “The secular bear market is statistically likely to end some time between Tuesday and 2017.”

      So far, I don’t see any reason to think this secular bear market won’t end up in the same 9-18 year range that includes 90% of all prior secular bears . . .

      I cant tell you about what some investors did, but if you were reading the blog in 2007-09 you know what we did — we were mostly in cash for most of 2008 to March 09.

      • Gloomy says:

        You claim to follow an asset allocation model and that decisions to time markets are a bad idea. So how does that square with “we were mostly in cash for most of 2008 to March 09″?

      • I am going to split some hairs here:

        First, I draw a distinction between a 100 year flood like the 2008-09 collapse and the usual sort of market timing most people do. Let’s say some people can make calls like that but once a decade.

        Second, I said YOU cannot do it. YOU most likely don’t have the discipline, the emotional ability to withstand that. The majority of traders don’t and nearly all of the public don’t either.

        When we went to cash, we did 3 things: We created a “buy loss” where we would have to buy back in if the markets reversed; we used that as a trailing buy stop that followed the market lower; and we were constantly evaluating levels for re-entry points;

  10. Gloomy says:

    What do you think of O’Shaughnessy’s What Works on Wall Street approach to equity selection?

    • What Works on Wall Street is now in its 4th printing — its a classic.

      If you apply these quant theories to stock selection and portfolio management, you can pick up about 300 basis points in performance over the SPX. However, you are likely to give a lot of that back in the down cycle, as they remain full invested in equities at all times.

      Also, I like Jim personally — super nice guy. We have a project we are working on together in the Fall . . .

  11. Conan says:

    If you like the idea that Barry has proposed in this article. I would suggest to read the following books:

    A Random Walk Down Wall Street – Burton G. Malkiel

    The Little Book of Common Sense Investing – John C. Bogle

    The Ivy Portfolio – Mebane T. Faber

    For less than 50 bucks on Amazon you will get a good education!!

  12. Molesworth says:

    You Wrote: Own five to nine broad indexes, typically in exchange-traded funds (ETFs) or low-cost mutual funds. In decreasing amounts (35 percent, 30 percent, 20 percent, 5 percent), you should own: large caps, small caps, emerging markets, global equities, technology, real estate, bonds (corporates, Treasurys, munis) and commodity indices.

    Q: Decreasing amounts in that order? So are you suggesting something like: 30% Large Cap, 20 Small Cap, 15 Eem, 5 Global, 5 Tech, 5 RE, 5 Corp, 5 Treas, 5 munis, 5 Commod?
    That would amount to ~63% US (LC, SC, 3 Global, 5 Tech, 5 RE), 17% Intl (15 EEM + remaining 20% of Global), 15 Bonds, 5 Commods.

  13. [...] Missed the Big Market Rally? Here’s What To Do Now (The Big Picture) [...]

  14. Tacomaman says:

    Thanks BR for that post! I deployed some fixed income capital today, as many bond ETF’s were oversold.