Let’s step back from the investment market environment and talk about shopping for goods on sale. Who doesn’t love finding something they’ve been looking for on sale? We meet a need by acquiring an item at a lower cost than initially anticipated. Isn’t it odd that nobody seems to like a sale on stocks or bonds? In the investment markets, when the price goes down, investors panic instead. Why? The answer is perspective. Rather than looking at the opportunity to buy more shares of stock more cheaply than last time, we look at the decline in value on our most recent statement.
This is where so many investors get tripped up. Their perspective shifts toward stopping the decline in the current value of the portfolio. To make matters worse, it seems like every financial expert on our favorite investment show is explaining exactly how to make the declines stop. I’m here to tell you – this is hogwash. Would you be surprised if I told you that volatility is the exact reason we are rewarded with better long-term stock returns than we are on more stable investment options such as bonds? It’s true. The long-term average return on stocks is about 9%, while the long term average return on bonds is about 5%.
Rearranging portfolios tends to be counterproductive. Sure, it feels good to stop the decline in value. The simplest way to do that is to sell investments and put the proceeds in the bank. After that, it gets much tougher trying to decide when to get back in the market. Most investors experience one of two preoccupations. The first is that they tend to have some sort of percentage market decline in mind that will signal it’s time to repurchase investments. More often than not, the number cited is a 20% decline. In my nearly 40 years in this field, I have rarely seen investors presented with an opportunity to capitalize on this plan. Why? Our psychology leaves us wanting more. When the market reaches a 20% decline, we equate the selloff with the prospect of even further declines. What keeps it from going down 25% or even 30%? Nobody rings a bell when the market hits bottom. As we try to capture every last penny while waiting for the bottom, the bottom passes us by, and the market heads higher. Destined to win, we continue waiting to reinvest until we can’t stand it any longer, and our fear of missing out on more gains gets stronger than our pride at having missed the bottom. Often, money finally gets reinvested at a point where the market is higher than where we initially sold. The second preoccupation is that the market never reaches the 20% selloff target. It goes down 10 or 15% and then begins to head higher. Convinced we are right, we keep waiting to see a 20% decline, perhaps ultimately reinvesting at higher levels than when we sold. It is the rare exception where market timing works.
Many of you know we have a number of CFA charter holders and CFPs® in our shop at Bell. There are reams of information and hundreds of hours studying that go into each of the exams to achieve the educational requirement for these designations. As a challenge to everyone in the department, I ask them to bring me a paragraph (not a chapter, just a paragraph) that speaks to the success of market timing. In the 10 years or so that this challenge has been in place, I have yet to see it.
There are reasons to revisit your portfolio allocation. Your primary reason should be tied to your long-term goals. If your goals have not changed, and the portfolio is aligned with those goals, press forward through the volatility.
I have grown more fond of sayings I heard growing up. The one I am thinking of today is, “Do as I say, not as I do.” I’d epitomize this if I explained why you should not time the market, then did just the opposite in my own retirement account. Nothing could be further from the truth. I am doing just as I am saying and staying fully invested. I hope this helps provide some comfort.
Thank you for your business and confidence in Bell.
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