It all looks so easy on paper, but in real time, using real money, making strategic investment choices is hard. Especially during a banking crisis that threatens the broader global economy.
Each January, we offer an historical chart of how the major asset classes fared on a calendar year basis, starting with the recently ended year and going back several years. Here's what we published this past January--see table at end of post. Looking at this history leaves the impression that one can easily sidestep danger and favor the winners over time. In fact, looking at the past and managing portfolios in real time are equivalent only in the sense that both are focused on investing. But one and only one is immensely difficult, and the reason has as much to do with managing emotions as it does with informed financial analysis.
There are many ways to manage the various pieces of the global market portfolio. We can exclude certain pieces, load up in others or own everything, either in a passive market-value-based mix or by way of an alternative methodology, i.e., active management. But no matter how we manage our portfolios, we must make decisions, all the more so at extreme points in the cycle. At the very least, rebalancing the mix, according to some preplanned strategy, is critical. The exception is building a passively weighted portfolio that self adjusts, thereby remaining weighted as per Mr. Market's portfolio and effectively putting the rebalancing on auto pilot. But even there, we must decide how much cash to hold, if any, in relation to owning the passively managed global portfolio and how that cash/risk portfolio mix should change over time.
The point is that decisions must be made at times. Invariably, some of those decisions will be wrong. But doing nothing solely because of fear, when reasoned analysis suggests action, is a mistake. A strategic mistake, and perhaps one that will forever haunt us.
Indeed, the only thing worse than watching one's portfolio get crushed is doing nothing during or afterwards, once prices have dropped sharply. No, we don't know where the bottom is, or when it will arrive. Our leap of faith is that a rebound will one day come. Could be on Monday, or several years from now. We simply don't know, but we can't risk assuming it's never coming or that it's so far off in the future that there's nothing left to do but sit idly for years.
Rather, we're confident that the only hope of earning modest if not spectacular returns in the years ahead requires some degree of availing one's portfolio of lower rather than higher prices. Ultimately, successful investing boils down to buy low, sell high. Simple to say, hard to do, but we must intelligently strive toward that ideal.
Again, easier said than done. The natural order of the financial universe, for the average investor, is to buy high and sell low or buy high/low and sell high/low. It's easy to lose money, in short. Any one can do it. Making money is harder, all the more once you factor in commissions, fees, taxes, etc. The net result--the real net result--looks uglier than most people realize. In the grand scheme of investing, the deck is staked against most of us. That doesn't mean we're doomed to lose lots of money, although that happens more often than a casual observer might suspect. Yet mediocrity is too often fate, and that's assuming some degree of diversification, i.e., owning mutual funds, ETFs, etc.
If we can summarize what we've learned about strategic investing over the past 50 years, it might roll out like this: keep fees and expenses low, diversify broadly within each asset class; own a mix of asset classes; develop a sound long-term investment strategy and stick too it, but leave room for nuance. By nuance we mean: pare back exposure to risk after a long run of good times or when valuations go to extreme so that assets are priced for perfection. The flip side of that nuance is ratchet up exposure to risk in a measured, time-diversified process when prices fall.
The alternative of sitting idle and missing the opportunity to lock in relatively higher prospective returns certainly looks unappealing. Nonetheless, in the current environment one can argue for waiting before buying. That's certainly reasonable today, next week, next month, perhaps even next year. But there's a fine line between making a tactical decision to avoid new purchases and suffering from fear and doing nothing for long periods as a result.
So, yes, we can all reasonably decide that now is still not a good time to buy. But if not now, when? Each investor's answer will differ, as per the interpretation of events and valuations. But do you have a plan? Is there a price point or valuation point when new investments are warranted? Have you thought about the answer thoroughly? Have you talked it over with an advisor or informed investor, if only to get some feedback? Will you spread out your new investments over time, which is eminently reasonably in times of high uncertainty? Or will you sit there and find an excuse not to buy today--or ever?
We're all vulnerable to doing nothing in times like these. That provides some emotional satisfaction, but the satisfaction has a limited shelf life. Investing is always uncertain. Always. But sometimes the odds look a bit better for prospective returns. That creates opportunity. If that sounds like bad advice at this moment, perhaps that's a sign that the prospective opportunity is higher than normal.
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This article has 12 comments:
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JasonC
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367 Comments
Oct 10 01:02 PM-
adventurerneil
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3 Comments
My Website
Oct 10 01:11 PM-
cristian
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29 Comments
Oct 10 01:13 PMThere is nothing wrong with cash and gold, they are eroding much slower than the markets.
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Jerlad
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24 Comments
My Website
Oct 10 01:18 PM-
Frank Miller
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11 Comments
My Website
Oct 10 01:51 PMBest,
Frank Miller
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one more once
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5 Comments
Oct 10 02:01 PM-
CloroxCowboy
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32 Comments
Oct 10 02:47 PMadventureneil, I'll simply ask "How can you, me, or anyone possibly know for certain that cheap will get any cheaper?" Same question for 'one more once'. Nothing wrong with patience, but eventually you have to take a swing at something or go back to the dugout.
cristian, if you're saying that being in cash or gold over the past year would have been a good idea, I agree. If you're advocating making that switch now, it's too late my friend. Ditto for Frank Miller's comment. It's far too late to correct any hesitation that might have occurred earlier this year. Better to begin buying in gradually now if you got out early, or hold on to your shares if you weren't lucky/smart enough to sell before now. And if you're the 50-60 year old who has just seen his 401k go up in smoke because he violated one of the most basic principles of asset allocation - being heavily invested in volatile securities so close to retirement - and now you're in panic mode, there's not much I can say...please don't blame anyone else for that colossal mistake.
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longtermstocks
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91 Comments
My Website
Oct 10 03:19 PMBecause:
1. We have many countries working together.
2. Fed / World banks are putting a lot of $$$ into the market.
3. We will be pulling out of the war soon. For many reasons.
4. If this was just a US problem we could have some problems, but the whole world is in this together.
5. New innovations in energy (generation, transition and storage) will drive the markets. Innovations drive markets.
6. The media. Once confidence improves word will spread quick and people will get back into the market sooner than in years past.
7. This may result in major changes (such as fairtax, it exposes the need for political change - congress). Get the jokers out of office.
I thought the crash was coming last year and have been 70% out of the market since then. I am a buyer in about 2-3 weeks.
Over the next few years we need real reform (Like Ron Paul Real).
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Smarty_Pants
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1130 Comments
My Website
Oct 10 03:52 PMPersonally I was in cash in Nov 2007, bought QID shortly after and got out after AIG was assimilated as the uncertainty of the gov't changing the rules was too risky for my tastes.
I wish now I'd stayed after the seeing past two weeks. I left a lot of $ on the table, but you can't be perfect. I'm happy to be far ahead for the year and sitting mostly in cash. I can wait for the bottom. No hurry.
I don't have to get in exactly AT the bottom. I'd rather wait until I know the trend has reversed to the upside and avoid taking an unecessary loss.
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Techzone12
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22 Comments
Oct 10 04:06 PM-
TA
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345 Comments
Oct 10 09:06 PMPlenty of market timing geniuses on here I see
Like JasonC I am a long term dividend investor who has been moving into the market over the last year and will be for next few years. Because of that and a lot of buying this week I am down less than half of the market. I won't be so lucky on the next bear.
Happy market timing
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carey_jim
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558 Comments
Oct 11 01:02 PMIn fact, fear is one of the major reasons most people to do the right thing.
Your mother: "Do you want to end up in prison or begging on the street like that homeless guy over there? Then [do the right thing.]"
But Greed, the opposite of fear, is truly a bad investment strategy because, like fear, greed causes us distort reality but unlike fear, greed CAN be (and should be) controlled.
No one, under any circumstances, wants to be broke (except for a few odd ducks like Henry David Thoreau) but almost everyone has fantasies of being rich.
Your mother: "Eat your peanut butter sandwich or I'll whack you on the side of your head."