Fully Invested: The Key to Success?
To be honest, I think that most of my success over the past 8 years has been due not to stock picking skills (though that has helped some) but to the simple strategy of staying fully invested. Not that I don't have any bonds or alternative investments, but, with regard to the portion of my portfolio allocated to stocks (based on a % based on my age) I have stayed fully invested in equities and out of cash (with rare and brief exceptions that didn't do me any good).
Yes, in 2008-9 I rode it all the way down to the March '09 bottom. Lost a lot of money. Rode it all the way back up (and then some) subsequently while others were dithering.
There are two unassailable reasons why this works:
1. Over time, the market always beats cash. If your time frame is over 10 years (and the world as we know it doesn't come to an end), you'll always do better with 100% equities than with any other ratio.
2. No one can successfully time the market consistently. Get out at the right time and back in at the right time? Maybe once or twice out of sheer luck, just enough to make you overconfident. Setting aside cash to buy more stocks when they go down? They may never be this low again. If you had tried that last fall, before the fiscal cliff and sequestration and all, you would have had a bunch of cash sitting around idle while the market had four huge months. You might be able to pick winning stocks over 50% of the time (I do). But you can't time the market. No one can.
If both of those are true, you will make more money by staying 100% - 0% equities to cash than you would by any other ratio (realistically 1-2% cash just because you don't need to buy a new stock the instant you sell an old one).
I consider this one of the inviolable rules of investing. It will work if you are investing for yourself and have the stomach for it. It won't work if you are investing for others because they will panic and tell you to sell (and later buy) at the wrong times.