I'm Not Trying to Time the Market, But Here's What We Should Do
Wednesday, November 23, 2011
"...Move out of stocks or gold because I think they've been too hot and will crash soon", or "put some money in X because I think it's going to be hot soon." If I had a dollar every time I heard such things from clients, prospective clients, or people at a gathering after they find out that I'm a financial adviser, I could retire to the French Riviera right now, only to be seen by my family and friends during the holidays and hunting season.
In the past 20 or so years, the general public has gained access to various information, tools, and calculators that in the past were only available to financial professionals. Go to the website of a major discount broker and punch in some basic information and all the work will be done for you without having to understand all of the nuts and bolts. Most people get so much educational material thrown at them by their 401k/403b plan, one might begin to wonder how we're able to replace all the trees that had to be cut down to print it all. Data dating back to the beginning of financial markets shows that guessing market movement consistently is just not doable Couple that with the often repeated fact that 80% of mutual fund managers fail to beat their indexes, and the table that shows how being out of the market on a small handful of days in a decade or two decade span will miss most of its gains, one wonders how an individual can overlook such facts, but they do so again and again to their own chagrin. Why? I don't know but I'm going try and tackle it. Bear in mind though, I have no PhD in Psychology, just empirical observation.
WHAT IS MARKET TIMING?
One might think it includes pulling all of your money out of a particular asset class (stock/bonds/gold/real estate etc.) when one thinks or feels it's going to go down and re-investing it back in when one thinks it's going to rise, and while that is definitely market timing, it's an extreme version that not many people engage in due both to better education, and various rules and penalties that were put in place to dissuade this type of behavior. The definition of market timing that I go by is to change the strategic allocations of one's portfolio based on an "ungrounded" barometer such as market gyrations or a recommendation by an "expert" in some type of media, instead of by a more "grounded" barometer such as a change in life situation or a genuine change in risk tolerance. If, for example, your portfolio has a current stock allocation of 40%, but you decide that the market is due to rise due to some perception you have or some talking head on CNBC has, and you change the allocation to 45 or 50% based totally on that perception, you are a market timer, like it or not.
WHY DO WE TIME THE MARKET?
Better yet, why do we try timing the market when we logically know it has resulted in failure time and time again? Partly, because of the same reason we buy lottery tickets or visit the casino when we know the odds are stacked against us, optimism. We inherently believe that we're special. Besides, mom told us so. We're smarter, and have better resources than our neighbor, our "experts" are better than his "experts." Why else would the actively managed mutual fund market still be raking in new money? Why else do huge sums of money move out of said funds AFTER the market tanks, and move back in AFTER the major move upwards? Because we know when the turnaround is coming, and no matter how wrong it turns out to be we continually do it.
Another reason is control. In today's turbulent times, people's yearning to be in control is greater than ever. With all of the stuff out there that is out of our control, wars, the national debt, natural disasters, disease and sickness, we all desire one or two portions of our life be controllable, our money is one of those portions. The only trouble with this belief is that the global financial juggernaut is so huge, that trying to fight it is futile at best. Even if you could get information as timely than the Big Boys (pension funds, insurance companies), your tiny little order falls down at the bottom of the pecking order getting filled.
HOW DO WE STOP?
Well if I knew the answer to this exactly I'd probably be on the payroll of every pension plan in the world, but unfortunately all I can to is offer some personal suggestions. First, don't get a steady diet of cable business news or constantly spend time on financial websites. That's just as bad as going in to your favorite store to look around when you're tight on cash for the month. In either case you're going to convince yourself you need something and the time to buy is NOW! Go into an online broker's site or pay an independent adviser or financial planner a flat fee to help you set up an allocation (if that's all you want the planner to do.) Once you implement the plan, re-balance the portfolio on a regular basis (quarterly, semi-annually, or annually) but other than re-balancing LEAVE IT BE! I don't care if Ahmadinejad is threatening to blow up Israel, Congressmen and women are having an old west style shoot out in the Capitol Building, and Obama is shooting over par in his golf game that day! DON'T TOUCH THOSE ALLOCATIONS!
Another thing you can do is be honest about your risk tolerance. While stocks have the highest real rate of return over time, they do fluctuate, and while most people can stomach a little market turbulence with at least a small portion of their money, maybe you can't. If stock market volatility in any measure is to much for you to bear, DON'T INVEST IN THE MARKET. Yes, it pains me to say that, and no,you may not have as much money in retirement because you weren't able to keep pace with inflation. But if market gyrations cause you not to eat or lose a lot of sleep, you won't make it to retirement age anyway, better to be poorer but still alive I would say.
In closing, pick a strategy, stick with it, and don't confuse brains with a bull market. You, nor I, nor the gurus that try and sell you their stock picking course at 2 a.m. are that good that we can predict where that market is going to go on a regular basis.
Christian Halas is owner and wealth manager with Halas Consulting located in Pittsburgh, PA. Halas Consulting prides itself in providing unique and objective solutions to various insurance, investment, banking, tax, and estate issues faced by individuals and small businesses. Investment services provided in conjunction with Venn Wealth and Benefit Services, a PA Registered Investment Advisor. Christian can be reached via email at chalas@venn.us with any questions or comments on this article.
