Family day weekend in Southern Ontario has historically been filled with ski holidays, outdoor hockey games and justifying your Canada Goose jacket purchase. However, this weekend seemed to have a different history of record temperatures and thoughts of trading-in the skis for bikes. With this feeling of optimism that spring is on the way, it reminded me that two days of sun in February is not enough weight to change the winter tires, just as two months of positive returns in the stock market is not assurance that your portfolio should be 100% equity based.
As a province that enjoys four seasons of change a year, it should be customary to have your life prepared for the needs of the seasons. For your portfolio, it should also be prepared for different seasons. These seasons are not weather-based but cycle-based. A cycle is defined by Oxford Dictionaries as “a series of events that are regularly repeated in the same order”. This is an important factor when pricing assets classes in your portfolio. I am not saying that certain asset classes are over-priced or under-priced, I am just saying that the prices of certain asset classes should be compared to the last time they showed similar valuations. If the valuations are similar to a past occurrence, then perhaps a cycle can be seen. The challenge with analyzing cycles is time. If you look at a period of one year, the cycle may not be apparent. However, over ten years, you have a greater chance of seeing the cycle. Try this with real estate, mortgage rates, U.S. Equities, Canadian Savings Bonds etc.
Because of the short-term blindness of changing cycles in different asset classes at different times, it is difficult to manage your investment dollars by cycle-timing or “market-timing”. Just like the two-days of sunshine in February, you must prepare accordingly. In your portfolio, you can do this by diversification of asset classes, geographical locations and dollar-cost averaging your deposits.