I am constantly asked, “Can’t we just take the money out of our portfolio when the markets are going down, and then put the money back in, right when it hits the bottom?”
While this may sound like a reasonable plan, in reality it is absolutely impossible to actually accomplish.
No one knows when the market will “hit bottom.” Anyone that says they can time the market is either lying or delusional.
The perils of market timing have been quantified by Dalbar, a highly-regarded financial services research firm.
In a study they conducted from 1995-2014, they looked at what various investments actually returned vs. what average investors actually made. From 1995-2014 (averages):
- Stocks: +9.9%
- Bonds: +6.2%
- Int’l Stocks: +5.0%
- The Average Investor: +2.5%
- Inflation: 2.3%
That means that the average investor only captured about one quarter of the total return of the stock market. The primary issue the average investor faced? You guessed it—market timing. Investors were switching in and out of funds at inopportune times.
Human beings are emotional creatures. Everyone knows that you should “buy low and sell high” but very few people actually do it. People panic. People make irrational decisions.
You need a plan and you need to stick to it. Stop thinking you can outsmart the markets. You can’t.
I hear all kinds of alternative investment ideas that sound good to some people, and, while I can’t guarantee what will happen in the future, I can’t help but notice a pretty remarkable history of success when it comes to good, old-fashioned stocks and bonds.
It seems we human beings can’t help but try to find the “next best thing.” Why are we trying to reinvent the wheel?
The wheel is not broken. At all.
During the course of my day-to-day business, I see a myriad of people just like you with portfolios filled with non-traditional investments.
Marijuana Stocks: You were a product of the 60’s. You would think there would be a huge demand, right? It’s not as simple as that.
Problems: Mutual funds focused on the marijuana industry lost 70% in 2020. The industry is so new and there are so many unknowns. Believe it or not, there is an incredible oversupply of cannabis. Not to mention it is not even federally legal.
Bitcoin: I have no problem with Bitcoin. It could become a big player in the global financial markets. I have no idea. But the daily volatility is incredible. It is pure speculation. You are gambling.
Collectibles: Want to stake your future on classic cars, coins, art, and jewelry? Then this is for you!
Problems: Uncertain pricing, forgeries, doesn’t produce any income, high costs for storage, no consistent track record, no income, limited transparency, high commissions.
Venture Capital/Private Equity: Want to get in on the ground floor of a new business? Do you really like watching the TV show Shark Tank? Then this is for you!
Problems: Illiquid, highly speculative (you could lose all of your money), lack of transparency.
Currency Trading: Want to bet on what direction the dollar is going to trend in relation to the Euro? Have fun!
Problems: Zero sum game, no consistent track record, a short-term trading strategy with no academically provable benefit, wildly volatile.
Shorting the Market: Want to make money when the stock market goes down? Be my guest. But, remember, the stock market has been going up by an average of 10 percent over the past 200 years. It’s kind of like betting on the Detroit Lions to win the Super Bowl.
So what am I trying to say?
A diversified portfolio of stocks and bonds is a strategy with an incredibly long, consistent, and successful track record.
Don’t make this more complicated than it is. Use the wheel. It works. It will get you where you want to be.