Consider the following example: Two years ago, with interest rates having been held at the zero-bound in the face of rising inflation, we reduced clients’ exposure to the most interest-rate-sensitive bonds in anticipation of, not in response to, rising interest rates. We made tactical (short-term) adjustments to strategic (long-term) investment plans. If we had waited for rates to meaningfully appreciate, we would have been too late. Last year, the Bloomberg Barclays U.S. Aggregate Bond Index declined over 13%!

“Bill, I want to protect myself against (some future event).” Assuming the risk is credible, such as an overvaluation (e.g., tech bubble), the challenge is timing. Markets can move far higher for far longer than valuations support. (The same is true going the other direction.) In the example above, we could have been wrong in our timing and missed out on continued gains, incurring an “opportunity cost.”

In summary, most long-term investors would do well to follow the following advice: 1) turn off the noise (news); 2) stick to your plan; 3) periodically rebalance (trim that which has risen the most and add to that which has lagged the most).