Articles on investing and capital management, with a quantitative focus.

#bigpicture - Big picture thoughts

Trouble Investing New Money


Are you having trouble investing new money? Are concerns about an overvalued stock market preventing you from making purchases? This could be an indication that your asset allocation isn't right for you.

You might need to lower your percent allocation to stocks.

In the following, I will assume that you already have an asset allocation plan. This means a commitment to some percent stocks, bonds, or other things. If you invest in a standard Balanced Fund, then your asset allocation is likely 60% stocks, 40% bonds.

The Fear

I'm not saying you should ignore your fears. The fears are justified!

Stocks are incredibly volatile and unpredictable things. Based on US history, the annual return in the stock market can be anywhere from -50% to +50%. This is an insanely large range. You can make or lose a lot of money in any given year.

Ignoring the most extreme events, and only looking at typical years, the range is still very wide: about -15% to +25% in any given year.

Some experts point out that market valuations, such as the Shiller PE or CAPE, are very high today. I share their concern that stocks might be unsustainably high right now.

At the same time, there is no way to predict or anticipate the stock market. The high valuations could continue! I don't know what the market will do, and neither does anyone else.

What to do about the fear?

Most investment professionals try to talk people out of their fear of stocks. Advisors use behavioural coaching to help investors ignore market noise and volatility.

This is just my opinion as a layperson, but I don't think it's a good idea to suppress your fears. If you already think the stock market is scary today, just wait until it's down 30% and every headline is talking about economic collapse. Your fears will come bubbling up to the surface.

If behavioural coaching was so effective, we wouldn't get market panics.

What if, instead of playing mind games to ignore volatility, you actually reduced volatility instead? A more conservative asset allocation, with more bonds, will reduce volatility. You can even use GIC (Canada) or CD (US) instruments to eliminate fixed income volatility.

The solution

It's better to be continuously invested in a conservative asset allocation than to have large amounts of cash earning nothing because you can't commit to an aggressive asset allocation.

I suggest finding the asset allocation that works for you. If you have a lot of trouble adding new money to a 60/40 balanced fund, then it might be a sign that this allocation is too risky for your taste.

You might consider a more conservative allocation such as 35% stocks and 65% bonds as described in this article.

Jem Berkes