The Fallacy of Asset Allocation

Dec 2014 //
Investing
Optimism/Pessimism
Behavioral Finance

Many investors need to feel good about the outlook for their investments before they buy, but stocks almost always make their lows during very gloomy times (as in 2009).  So it’s extremely difficult to feel good enough to buy low, yet buying low is step one in timing the markets.  Catch-22.  It isn’t hard to find financial advisers who nod their heads and say they don’t attempt to time markets, but their ever-changing “asset allocations” essentially amount to just that.  Put differently, some of the same people who claim that market timing of individual investments is impossible seem to think that timing via changing the weights of various groups of investments (e.g., large-cap growth, small-cap value or other categories) will somehow work.  This is akin to saying that if you group unpredictable individual things, somehow the group becomes predictable.  We know of no advisers or market gurus who have success­fully timed individual stocks, mutual funds, exchange-traded funds, or asset classes on a consistent basis.  Indeed, studies of market timing, fund switching and asset-class changing suggest just the opposite.