Posted by John Posey
Most investors at one time or another will consider the possibility of getting out of the market temporarily and going to cash with all or a significant portion of their wealth in stocks in efforts to conserve capital often in reaction to events or predictions that are not personally affecting their life – external events. And the idea is to eventually get back into the market when it “looks good again” or “things settle down.” It certainly makes sense why these impulses come about as they are often hot topics in the news and in conversations with others that encourage us to reconsider our options. So does some form of timing the market work? In terms of selling to preserve values with the idea of reinvesting in the future – rarely, if ever in my experience. That’s assuming your definition of “work” means to consistently put yourself in a better financial position. Let’s just say it works until it doesn’t, and it’s often a high stakes game. I mean, if you can’t gamble with your retirement funds what can you gamble with? :) Typically, the real trouble comes from trying to decide when to re-enter the stock market. If you got out because you couldn’t stomach it, it’s unlikely that you’ll ever feel comfortable getting back in before it’s advanced beyond the point when you got out in the first place. Besides, you, I, nor anyone else would ever know when the “right” time is…it’s impossible to know or time it with any precision and the market can move fast.
Listen, if market timing worked consistently well based on powerful evidence, someone would have publicly substantiated their theory, demonstrated their ability to do it with consistent success, independently validated their data, made a fortune, and the approach would be widely accepted by the broader investment advice industry, right? Throughout my career in financial services, I’ve found no compelling evidence that market timing can be systematized into a disciplined, detailed, and repeatable process that delivers consistent, positive results. There will always be others that claim they can, but they generally have trouble with providing truly independent evidence to support it. The reality (and relief) is just being invested is significantly more important than timing – check out my previous post, Focus On Time Over Timing, for an interesting example of the impact of timing. It can be prudent to consider using hedging strategies like buying put and call options or other guaranteed type products like annuities, but we can expect to pay Wall Street or insurance companies a healthy amount for those features. The cost of using these options can reduce potential outcomes and our long-term wealth so I prefer to use them as sparingly as necessary, but they can have a prudent place in a financial plan.
My strong advice regarding market timing to avoid loss with plans of re-entering the market later is: DON’T DO IT! I truly believe it is not in your best interest. If you’ve ever had a conversation around this topic with me before I’m sure you knew my typical broken record response was coming. So what typically works better? Pig-headed determination and discipline to a long-term, diversified investment strategy. I know, it’s boring but I’ve seen it work time and time again. Financial discipline equals financial freedom. Market timing is not disciplined behavior – it’s most often an emotional reaction like throwing a tantrum! Warnings of the market’s impending doomsday generally grab our attention because the pessimism sounds like someone trying to help us. It’s usually cynical messages that awaken our deepest market timing desires. Not many of us would listen to an overly optimistic person tell us everything is great and only going to get better – they’re just trying to sell us and often enough they are. Ever noticed optimism doesn’t tend to get the headlines as much? I have and I don’t think it’s a coincidence. Pessimism sells better so just be aware of it. Instead of putting much thought into the direction of the markets in the short-term, I would focus on the intersection of what actually matters AND what you can control, like your own level of savings or distributions and the happenings in your own life.
Read again later this month when I talk about throwing horseshoes and hand grenades – figuratively, no need to sign a waiver. It's about investing cash opportunistically.
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