We've been getting a few calls about volatility and advisability of reducing stock risks in portfolios. The short answer is that we generally don't do it. The reasons are abundant.
In 2007, fearing a recession, we did have the foresight to raise cash in some accounts; mostly the now Segment all-ETF strategy. That move proved both fortuitous and futile.
It was fortuitous because it deflected a big portion of the downside during 2008-2009. It was futile because, as is typically the case, it felt so good to have cash we missed the optimal re-entry point by a large margin. Our ultimate re-entry was after the bottom had long since passed. Yes, it made it a less agonizing ride, but after taxes were paid from selling and missing the bottom, I doubt we were much better off. We also lost our place in line for a tax-free step up in basis, should any client carry shares to the end of their life. This point is overlooked by most, and it is almost impossible to value, but it surely has some value that should be protected when possible. This should lead to a natural bias to stay put.
The really important question becomes, "What are the odds at this moment in time that my future stock returns are positive"? We took a 42-year history and looked at rolling 12-month returns to determine at any moment in time, what were the expected odds of stocks being higher 12 months out. Those 12 month periods were positive over 81% of the time. The returns are over 5% in 75% of all periods.
Another important question revolves around buying the dips. Does a 10% dip cause the odds of future success to increase or decrease? Some people feel that "tremors" in the stock market portend that danger is looming.
History does not support that theory. The odds of a positive 12-month forward return increase from 81% to 93% when a 10% dip has just occurred. The problem is that the jarring emotion of a loss is so much more severe than the pleasure of a similar gain, we all spend a disproportionate (and futile) amount of time seeking to reduce those risks. Yes, the math of long stretches of positive returns would indicate a setback is overdue. But over a lifetime what difference does it make when the positive results are so overwhelming? The math says go face first!