Everyone loves market premiums. But not everyone can withstand the risks. There are two possible responses – try to time the premiums or ride out the risk for the return on the other side. Which works better? Let’s look at history.

When markets are stormy, it’s natural to want to pull your portfolio into a safe harbour and wait for the weather to clear. Tactical asset allocation, as it is known, involves short-term adjustments to take advantage of market pricing.

The temptation to tinker is particularly strong for some people now given the poor recent performance of value stocks in Australia. A Dimensional Value index shows these low relative priced stocks have underperformed the broad market since 2010. That’s the longest stretch of value lagging since at least the early 1980s.

It’s natural, then, that some investors (and their advisors) might ask ‘where is the advantage in targeting value stocks?’

The first response to that question is that periods when value has underperformed the market are not unprecedented.

Yes, there has been a positive value premium in Australia over the long term, as there has been in other markets around the world (see chart over the page). But from year to year, realised premiums can be positive or negative. And there is no statistically reliable and proven way of timing this.

The second response is to point out periods of large negative realised value premiums can be followed by large positive realised value premiums, but not in a predictable way.

In the early 1990s, for instance, two years of poor relative returns were followed by sizeable gains. More recently, the global financial crisis encouraged a lot of second guessing. By March 2009, the market had fallen nearly 40% in a year, with value stocks falling by nearly as much. But in the subsequent year, the market came back with a vengeance, jumping nearly 38%. Value rose by almost 50% in Australia.

Getting the timing right to this extent is fiendishly difficult. The expected value premium is never negative, but we have seen that realised premiums can be both positive and negative from year to year. When it kicks in, it can do so suddenly and dramatically. And research has found no reliable way of timing it.

Imagine you’ve spent a fortune on tickets to the soccer world cup final. You take your seat and decide to go back to the bar to buy beers. But the queue is long and you end up missing the only goal. Can you afford to be out of your seat?

Nothing that has happened in the Australian market changes that view. And keep in mind that while value has underperformed domestically, there has been a positive realised value premium in other developed markets in the past year. So the notion that there is no expected reward for targeting value any more really is just a rationalisation of how people are feeling the risk.

The great value an advisor brings to a client is not in picking the turn of the market or cycle or knowing when to get out and back in again. As we have seen, these are very hard decisions to finesse. Instead, the great value an advisor brings is keeping clients in their seats so they don’t miss the goals when they are scored.

It’s an old story, but a true story. And like most old and true stories, it’s one that needs retelling every few years, because people have a tendency to forget.