In a recent post on his blog, The Big Picture, Barry Ritholtz explains why he prefers to employ risk analysis rather than market timing.
“Rather than making a low probability attempt to market time, there are quite a few things other things investors should at least be aware of, rather than attempt to jump in and out,” Ritholtz writes. Among them:
• Is my asset allocation percentages appropriate for the current secular cycle?
• How are stocks valuations? Measured by both a simple forward P/E and a longer term 10 year (i.e., Shiller CAPE), are stocks cheap or pricey?
• Am I taking advantage of mean reversion to rebalance my holdings based on asset class?
• Are interest rates rising or falling?
• What do the regular 5%, 10% even 20% pullbacks mean to your portfolio?
• Do I understand that my comfort level about market volatility and risk is typically inverse to present opportunities?
Rather than trying to time the market, Ritholtz says most investors are better off if they do two things: rebalance their holdings regularly, and change the breakdown of their asset allocations “on rare occasions”.