Table 2: Compound Interest: Investing early can make a big difference in long-term returns
Market Timing Can Conflict With the Efforts of an Investment Manager: The motivation for waiting on the sidelines is often a result of investors feeling like they already missed out on a bull market. While it may be true that some markets can hit levels of overvaluation that make them poor investments, investment managers with broad mandates are paid to identify and seek to avoid those markets. At RiverFront, we have been reducing our exposure to US equities, recognizing that the US bull market is now 9 years old, and we have been buying equities in developed markets outside the US, such as Europe and Japan, where we believe valuations are still considerably cheaper than they are in the United States.
An Alternative Strategy to Market Timing
Long-term investing deserves entry and exit strategies that are consistent with the investor’s goals and objectives and are based on a sounder footing than one’s ability to forecast market movement over short periods of time. We believe the goal of a long-term investor should be to get invested as soon as possible, while minimizing the risk of committing all their capital prior to a significant market pullback.
There are a number of strategies that can be used to accomplish this goal, and the strategy we have devised blends what we believe to be the best ideas from several strategies and tailors them to the long-term investor. It is a three-pronged plan we describe as: Immediately, Opportunistically, and Eventually.
- Immediately: Based on our view that the US market is around fair value and markets outside the US remain ‘cheap’, we prefer an approach of putting a portion of our cash to work immediately.
- Opportunistically: After not experiencing a pullback of greater than 3% thus far in 2017, we believe there is probably a pullback on the horizon. Therefore, we are inclined to hold onto a portion of our cash for an opportunity to invest at lower levels. Considering the short and shallow nature of pullbacks over the past six months, we set modest pullback targets of 3-6%.
- Eventually: For the final portion of cash, we often set a date or series of dates over the next 3 to 6 months to invest the remaining proceeds. Once the dates are selected, we believe it is important to adhere to the investment discipline regardless of the market levels at those times.
Past results are no guarantee of future results and no representation is made that a client will or is likely to achieve positive returns, avoid losses, or experience returns similar to those shown or experienced in the past.
RiverFront’s Price Matters® discipline compares inflation-adjusted current prices relative to their long-term trend to help identify extremes in valuation.
Market Cap index information calculated based on data from CRSP 1925 US Indices Database ©2017 Center for Research in Security Prices (CRSP®), Booth School of Business, The University of Chicago. Used as a source for cap-based portfolio research appearing in publications, and by practitioners for benchmarking, the CRSP Cap-Based Portfolio Indices Product data tracks micro, small, mid- and large-cap stocks on monthly and quarterly frequencies. This product is used to track and analyze performance differentials between size-relative portfolios. CRSP ranks all NYSE companies by market capitalization and divides them into ten equally populated portfolios. Alternext and NASDAQ stocks are then placed into the deciles determined by the NYSE breakpoints, based on market capitalization. The series of 10 indices are identified as CRSP 1 through CRSP 10, where CRSP 10 has the largest population and smallest market-capitalization. CRSP portfolios 1-2 represent large cap stocks, portfolios 3-5 represent mid-caps and portfolios 6-10 represent small caps.
Strategies seeking higher returns generally have a greater allocation to equities. These strategies also carry higher risks and are subject to a greater degree of market volatility.
Investments in international and emerging markets securities include exposure to risks such as currency fluctuations, foreign taxes and regulations, and the potential for illiquid markets and political instability.
Diversification does not ensure a profit or protect against a loss.
In a rising interest rate environment, the value of fixed-income securities generally declines.
Technical analysis is based on the study of historical price movements and past trend patterns. There are no assurances that movements or trends can or will be duplicated in the future.
RiverFront Investment Group, LLC, is an investment adviser registered with the Securities Exchange Commission under the Investment Advisers Act of 1940. The company manages a variety of portfolios utilizing stocks, bonds, and exchange-traded funds (ETFs). RiverFront also serves as sub-advisor to a series of mutual funds and ETFs. Opinions expressed are current as of the date shown and are subject to change. They are not intended as investment recommendations.
Consumer Price Index (ex Food and Energy) is an aggregate of prices paid by urban consumers for a typical basket of goods, excluding food and energy. This measurement, known as “Core CPI” is widely used by economists because food and gas have very volatile prices. It is not possible to invest directly in an index.