Wealth Management Resources by Wealth Enhancement Group

“Markets can remain irrational longer than you can remain solvent” is a famous line on Wall Street. The underlying premise for the quote is that your analysis that markets or sectors are overvalued or undervalued can be correct in the long-term, but so wrong on the timing that you must manage risk appropriately.

Research and experience shows us that the average investor’s tolerance for risk is higher when markets are strong or benign, but that self-assessment of risk tolerance will often be challenged as market conditions change. While a buy-and-hold approach of a fixed allocation appears to work best over the long-term, investors’ emotions can result in sales at the bottom and purchases at the top of market cycles, often resulting in poor outcomes.

For instance, during normal market sell we routinely get a small number of calls asking to transition an account to cash immediately. The rationale was usually something along the lines of “I saw this movie in 2008 and I don’t want to see it again!” This was a dramatic pivot from the calls and questions just a few months earlier, when investors asked “Why don’t...

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