Another instalment in a series of articles detailing how to design a secure, income-producing portfolio

In my previous article, I mentioned the reality that investment advisors, especially those affiliated with a large financial institution, operate with a very particular mandate, and that is to help their clients invest in a specific set of financial instruments within a portfolio that is supposed to be tailor-made to their risk tolerance. We now know that, thanks to the success of Modern Portfolio Theory and the exponential popularity of copycat investing, everyone holding these types of portfolios is exposed to more risk than they bargained for.

But if you were to walk into your advisor’s office today and ask for something different, they wouldn’t be able to accommodate your request. For them, merely suggesting a non-traditional investment would endanger their employment status, because they cannot suggest alternatives without bringing liability to their employer. That is, if your advisor helped you diversify in a completely new way, he could get fired. Genuine diversification, in this case, would be people doing things they’re not supposed to be doing.

For now, the established landscape of investment advisory does not have access to novel products for you to add to your portfolio – although this may be changing, as financial institutions are identifying a big gap in their product line.

For the many millions of people whose retirement security is riding on stock-market performance, for the vast numbers of people who need markets to behave a certain way to enjoy the retirement they want, we’ve got to unpack the concept of market timing. Experts generally say that trying to time the market is a bad idea – so why is nearly everyone doing it?

Though they’re never supposed to be, ordinary financial planning meetings are often the place where we make our chanciest assumptions.

Previously, I described a scenario that you probably know all too well: you go into your financial advisor’s office and review your portfolio. This review touches not only on your portfolio performance but also on your personal life circumstances, which guide the portfolio’s allocation: risk tolerance, expectations about college tuition or other large payments, current spending, projected retirement date, as well as projected spending requirements in retirement. On the basis of this information and your portfolio’s performance in the last reporting term, your advisor then adjusts or readjusts or doesn’t adjust your asset allocation. The overarching idea behind these meetings is to have a plan for generating the cash flow you need. Often, the financial advisor will map out projected spending all the way to end of life, to show how your investments will support your living standard until the very end. It’s a beautiful concept. It’s also the very definition of something that financial experts say not to do: market timing.

Market timing means buying or selling assets based on predictions of how the market will behave in the future. Academics and other experts cite abundant research showing that market timing is essentially impossible because we can’t predict how markets are going to move. Some traders attempt it anyway, and some of them get lucky here or there. But a strategy that involves targeting specific dates to exit investments is generally unsuccessful even in the short-term, and is rarely successful in the long term. In my own experience, I’ve seen any short-term gain, which may have taken months or even years to generate, wiped out in a day, or else a bad week or month. It’s happened to me.

Despite the clear evidence showing that market timing is a bad idea, a vast number of investors are doing it anyway, often without realising it. They don’t realise they’re engaging in market timing because of a myth that’s so pervasive hardly anyone ever puts it into words. The myth is that markets will accommodate my retirement.

All those ordinary financial planning meetings are presupposing that you’ll enjoy average returns throughout your years of saving and then, when the plan says it is time to extract cash to support your retirement, the supposition is that you’ll be able to liquidate at a favourable price. But all the data in the history of markets tell us that we can’t predict how markets will move, and certainly that we don’t know what prices will be when our personal cash requirements are greatest.