I use semi-automatic stock models and normally religiously perform the recommended sells and buys, trusting that the models are likely best used as designed. But during large market shifts on Mondays such as we have today, I always wonder if it would be better to pause rebalancing and reconstituting until the market calms a bit. Has anyone here actually tested a pause versus proceed approach when the market hiccups? I haven’t.
Unfortunately I do not have any data nor have tested during your “pause vs proceed approach when the market hiccups”, but I would surmise that if a model is robust, tested over different market conditions, etc then a viable action is to stick to the plan as you would normally do.
In these hiccups, there is plenty of indiscriminate selling to be sure, not all related to fundamentals. If your strategy is trying to find high quality businesses for example, but nothing has changed fundamentally, and your system looks for value as well, you may find some bargains.
And on the other hand, if said strategy is so highly trained on recent market conditions only, it may be picking up stocks that aren’t suitable for the future.
Not a straight answer, but I would prefer to stick to the plan, at least for now. That said, this is not easy (I don’t find it easy at least), as stocks are bleeding it’s tough to hold on and resist the urge to sell.
I agree with Ryan. On especially volatile days like today, you can wind up with terrific bargains if you’re attentive and careful. Then you can tell yourself, like I told myself today, “Well, I lost a ton of money, but I positioned myself better for what’s to come.”
Ryan and Yuval, thanks for your considered replies and I agree that logically the proper approach is to trust the process. Even so, every time I ASS-U-ME something logical is valid without proof, I wonder if the proof exists or if I’m “systematically coming to the wrong conclusion with confidence.”
Robert,
I do not know your situation.
But IF you are 100% long ports that represent an average (or median) model from the designers it might be your survival instinct kicking in.
Much like a young person believing in too strict of a diet, it can be healthy if their instincts do not allow them to stick to a diet that–if adhered to–would lead to anorexia.
It is possible that none of what I say applies to you personally. But perhaps others commenting do not have a full understanding of your situation either.
My concrete advice: cut back on the risk. Whatever the risk level is with your present strategy, it may not be the right level of risk for you at this time.
BTW, there is not total disagreement in the post above:
If you were 100% sure your strategy will have alpha going forward and that you can weather the volatility, perhaps you would not be asking the question. Ryan suggests that for some members there can be problems with their models and concerns may be realistic (as I do).
How much risk you are feeling does have something to do with the confidence you have in your strategy. Ultimately that is not really something anyone advising you on this forum can be sure about.
Best,
Jim
Thinking about it again, you could take your strategy(ies) and see how they performed during other market hiccups/corrections/volatility*. How did the system respond? Did it bounce back quickly? Or did it flounder for some time before picking up again (if at all)? At those same points, maybe look to see what happened if you didn’t rebalance, and waiting for things to settle instead.
- Caveat - not all hiccups and their underlying reasons are the same, so how a strategy reacts today may not be the same as it was in previous hiccups. A recession is different than a crisis (leading to a recession), which can be different than the risk of rate hikes (and the ensuing multiple contraction of many stocks).
But as Jim noted as well, whatever you do has to suit your risk tolerance. Again, very difficult to define as it varies person to person, but to consider.