It’s such a common occurrence that it has its own catchphrase: “flight to quality.” Whenever the investment climate grows stormy, many investors flee to the “safe” harbor of fixed income. When the stock markets again begin to shine, those same investors flood back in, chasing whatever stocks, sectors or asset classes seem the brightest. It seems to happen all over again the next time, and the next.

Is this a brilliant move? There are many instances in life when good timing makes perfect sense. If the forecast calls for rain, you may alter your plans and stay indoors. If there’s lightning afoot, you are wise to jump out of the pool, and fast.

But investing is different.

Equity/stocks for production — To capture market returns above the risk-free rate, you must be willing to remain at least partially exposed to the “elements,” i.e., the market risk inherent to investing in stocks. Keep in mind, you still capture market returns if you are invested 100 percent in fixed income. Just as spring rains yield summer fruit, stock market risk helps produce higher expected growth on your investments.

Fixed income/bonds for preservation — Fixed income, on the other hand, should be used to preserve wealth. It’s also used to create a protected income stream, so you can prudently consume the fruits of your labor during retirement.

Our strategy for portfolio construction is thus grounded in these principles:

• Determine how much risk you have the ability, willingness and need to take. Select an asset allocation that matches this risk tolerance.

• Implement this asset allocation using low-cost, globally diversified investment options.

• Do not change your allocation to stocks versus fixed income unless your risk tolerance changes.

We realize that staying put with your planned portfolio mix can feel counterintuitive when the market grows volatile, especially when you see others around you in feverish action. But if you’ve built your portfolio on solid ground, you’re far better served if you fight your “flight to quality” instincts during bear markets and ignore the craving to chase stock returns during bull markets.

The reason is relatively simple, even if the underlying data is extensive: Nobody can predict what the market will do next. This is true on both the gut-wrenching rides down as well as during the heady upward surges. Financial columnist and BAM Advisor Services Director of Research Larry Swedroe explains it well:

One reason that market timing fails is that so much of the market’s return occurs during very brief and unpredictable periods. Another reason is that you have to be right not once, but twice. Deciding to get out is easy compared to deciding when to get back in. If you go to cash, you may be ‘whipsawed.’ You risk getting out after a severe drop, missing a big rally and jumping back in only to experience another severe loss. You would end up worse than if you had simply stayed the course.¹

And that’s before you even consider the transaction fees and tax ramifications involved in frequent trading.

Understanding the appropriate, long-term fixed income strategy in your overall investment portfolio — as well as recognizing the costs associated with trying to time the market — prepares you to stay the course with a fixed income allocation that makes sense for you through a variety of climates, fair and foul.