Beware financial advisors who try to time the market

A recent survey cited in Investment News noted that 47.6 percent of financial advisors plan to decrease allocations to U.S. fixed-income investments in 2014. That’s because most economists predict that interest rates will rise as the Federal Reserve scales back its stimulus program and as the economy improves. The logical conclusion is that advisor are increasing stock allocations, especially international equities.

Apparently, these advisors have forgotten their poor market timing between 2007 and 2009. TD Ameritrade recently released data that illustrated platform asset allocations advisors had at the top and bottom of the market:

· In early October 2007, after five years of bull markets in which U.S. stocks doubled and international stocks tripled, financial advisors had only 26 percent of assets in cash and fixed income.

·  In March of 2009, at the bottom of the bear market during the Great Recession and just before the ongoing bull market started to run, advisors nearly doubled their allocation to conservative assets at 51 percent.

In other words, by putting their clients heavily into stocks at the height of the market only to sell at the bottom, advisors proved just how bad they were at timing the market. Rather than providing the discipline to rebalance, as a group, they did just the opposite.

Now that stocks are surging and the total bond fund declined by 2.1 percent last year, nearly half of the advisors surveyed are ready to lower their exposure to bonds. Sticking to an asset allocation would actually dictate that one should be selling stocks and buying bonds to get back to the target allocation. 

As is the case with predicting stock performance, the truth is that no one knows how bonds will perform, either. This is especially true of top economists, who have forecast the direction of interest rates far less accurately than a coin flip would predict.

Advisors I know don’t see themselves as performance-chasing, though that’s exactly what they are doing.  Many are shifting their investment sails based on the belief that a bond bubble is near, forgetting that historically stocks are riskier in a day than bonds are in a year. 

My advice is to always remember that bonds are the shock absorber of your portfolio. Because stocks have surged and bonds have declined a bit, rebalancing requires that you should buy bonds now. Swimming against the current of investing philosophy isn’t easy, but it's preferable to, and more profitable than, repeatedly following the latest herd off a cliff. 

A better investment than bonds are CDs with tolerable early withdrawal penalties. I love the Pentagon Federal Credit Union 5-Year CD yielding 3.04 percent APY, with the penalty being interest earned up to a year. This pays more than the Vanguard Total Bond Fund (BND), and at least you always get your money back. Your advisor probably won't recommend this strategy, as the credit union doesn't pay them. 

  • Allan Roth On Twitter»

    Allan S. Roth is the founder of Wealth Logic, an hourly based financial planning and investment advisory firm that advises clients with portfolios ranging from $10,000 to over $50 million. The author of How a Second Grader Beats Wall Street, Roth teaches investments and behavioral finance at the University of Denver and is a frequent speaker. He is required by law to note that his columns are not meant as specific investment advice, since any advice of that sort would need to take into account such things as each reader's willingness and need to take risk. His columns will specifically avoid the foolishness of predicting the next hot stock or what the stock market will do next month.