How Do You Assess Market’s Risks and Rewards?
I don’t think investors, individual or institutional, should use market timing strategies, and the reason is simple: The future typically unfolds in ways we do not expect it to.
What paying attention to the market’s potential rewards and risks can do is assist you with your portfolio decisions. During periods of greater risk, it can make sense to ensure your portfolio does not have an excessive allocation to overvalued asset classes (relative to your long-term strategy), to tighten your sell rules, and to avoid riskier or more aggressive strategies and investments. During periods of greater potential reward, it can make sense to boost your allocations to the undervalued asset classes (again, relative to your long-term strategy), to be more willing to put up with short-term price volatility in exchange for long-term gains, and to act in a manner that may be contrary to how your emotions may want to you to act (e.g., buying stocks in February 2009)