For investors who follow market news closely, there always seems to be something to worry about. Today, there’s frequent chatter about elevated P/E ratios and impending rate hikes, concern about how much longer the aging bull market can run, and even debate about exactly how old the bull market really is.

If you’re concerned about the market, maybe it’s time to trot out a key question that’s worthy of periodic review: Will I be able to stick with my current investment strategy come what may?

What we don’t know, and what we do

The reason we often advise not paying too much attention to market news is that so much of what isn’t knowable is frequently, misleadingly presented as if it is. No one knows what the market will do tomorrow, next week, or next year. But that doesn’t stop prognosticators with megaphones from doing what they do.

That said, the bull market will end. That isn’t some stargazing prediction; it’s a fact. No one knows when, but everyone with money in the market would do well to remember that all bull markets eventually turn into bear markets. Every investor should have that reality baked into their expectations and their planned response to the market’s eventual change of direction.

Unknowable, but not quite unimaginable

No one should choose a strategy based on predictions. Just ask those who pulled out of the market, thinking Donald Trump might actually win the election and that would trigger a sell-off. But everyone should choose a strategy having clearly imagined staying with it in good times and bad. That’s why asset allocation questionnaires typically ask what you would do if your portfolio fell by some huge amount in a short period of time (Would you sell all, sell some, hold, or buy more?).

The problem is, just as it’s impossible for any of us to predict the future, it turns out to be almost impossible for most of us to imagine the future. That’s one reason why so many people save so little for their retirement. They can’t imagine what their life will be like then. And it’s why some innovative thinkers are going to such lengths to help people save more by showing them computer-generated images of what they’ll look when they’re old. If people can actually see themselves at age 70, they reason, maybe that’ll get them to save more money.

Can you imagine a different market?

When the market is growing, it’s easy to pat yourself on the back for being such a talented investor. But it’s the tough times that make or break investors. And what makes a great deal of difference in successfully navigating those tough times is having decided well in advance how you will respond. Ideally, you would make no changes to your portfolio.

In order to actually live through a downturn without making portfolio changes requires the hard work of imagining that scenario.

Similar results, very different paths

Consider two of SMI's core strategies — Fund Upgrading and Dynamic Asset Allocation (DAA). Both are perfectly well suited for the full good/bad market cycle. What makes one perfectly suited for you depends on your temperament, time frame, and expectations.

Consider this: Over the past 17 years, those two strategies have delivered remarkably similar results — an average annual return of 10.4% for Fund Upgrading and 10.5% for Dynamic Asset Allocation (DAA was introduced in 2013; prior returns were back-tested). However, the paths they took toward those similar results couldn’t have been more different.

Here’s a look at the four worst years in that stretch and how each strategy performed.

  2000 2001 2002 2008
Wilshire 5000 -10.9% -11.0% -20.9% -37.2%
Fund Upgrading -2.7% 4.8% -14.1% -38.8%
Dynamic Asset Allocation 7.1% 4.0% 10.4% 1.3%

Now here’s a look at the four best years in that stretch and how each strategy performed.

  2003 2009 2010 2013
Wilshire 5000 31.6% 28.3% 17.2% 33.1%
Fund Upgrading 46.7% 33.6% 17.8% 34.5%
Dynamic Asset Allocation 22.4% 17.6% 20.3% 16.2%

Fund Upgrading is the more aggressive of the two strategies. It’ll typically fall harder during downturns, but then rise higher during upturns. DAA, on the other hand, is designed to mitigate losses during downturns (the strategy would have generated losses for several months in 2008 before turning things around), while participating in some of the gains during upturns.

Their different approaches are reflected in their different relative risk scores (how their volatility compares to the market). Fund Upgrading’s 1.07 shows it to be slightly more volatile than the market, while DAA’s 0.62 shows it to be much less volatile.

What about you?

Keep in mind, the results described above were from a particular time period. How will the market perform in the future? No one knows. Future periods of strength should favor the Fund Upgrading investor, future periods of weakness the DAA investor.

If you prefer a smoother ride, DAA may be right for you. Your challenge, and where you’ll have to manage your expectations, will be the periods of market strength, since your returns will likely lag.

If you’re attracted to the pursuit of greater gains, Fund Upgrading may be right for you. Your challenge will come during downturns, when you will likely experience losses similar to those of the market. You’ll have to manage your expectations accordingly.

But remember, you don’t necessarily have to choose one strategy over the other; you could manage your portfolio using Fund Upgrading and DAA.

So, back to our core question: Will you be able to stick with your current investment strategy come what may?