She had asked me if it was a good time to invest. This is the type of question I hear all the time that gets me, and I'm sure other advisors, to cringe inside. It's almost a lose-lose situation. If the market shoots up, you were not aggressive enough; and if the market drops, you gave the wrong call. When asked the question, I always think of price/earnings ratios and, unless they are at extremes, suggest that the client go with the plan we agreed upon.
What I didn't tell you is that the client who "lost" $800 is in her early 40s.
You can probably guess my response. I said that, if she had sold, then indeed she had lost $800. I then gave her the speech I've given many times. I explained that how the investment is doing now doesn't matter. What does matter is where it is 20 to 30 years from now, when she is drawing a paycheck off of her nest egg.
For what it's worth, I've come to believe that there are people who can't understand this. Actually I went on to explain that the best thing that could happen over the next several years for her and her husband would be a sustained market downturn because they are systematically contributing to their 401ks. Again, this is one of those things that some people hear but don't hear, if you know what I mean.
On the flip side, there were many people bragging in early 2000 about how much they had made in the stock market. We all know how that turned out.
I know where she was coming from. I told her it would have been great if we had a crystal ball and we saw the earthquake and subsequent tsunami coming in Japan and waited until late Wednesday to invest. But we didn't. Benjamin Graham chimes in on this one:
If I have noticed anything over these 60 years on Wall Street, it is that people do not succeed in forecasting what's going to happen to the stock market.Graham, of course, was Buffet's mentor and co-authored Security Analysis.
Do you think my client will email me (do you think email will even be around) 20 years from now and say that the $20,000 is now $80,000 and it turned out to be a great investment move?
I don't consider myself a market timer, but I do like buying on 100pt+ down days in the market. Anyone in their 40s has little to worry about in the day to day market fluctuations if they don't plan on using that money for 20 years. The odds are very strong that in 20 years their investment will be worth significantly more that it is today or when they made the purchase.
ReplyDeletere: I agree. Buying on big down days is a good strategy. For me it typically involves shifts at the margin. The same for asset classes. With the recent drop in interest rates for example I've shifted from AGG to CSJ (a few percent). In terms of buying dips etc. it is with money that is outside the overall plan which, at most is 20%. The 20% is for clients who want to buy individual stocks, time the market, market sector bets (ex. commodities or alternatives in general) etc.
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ReplyDeleteWhat boggles my mind is the focus on the $800 paper loss instead of reminding herself WHY she invested in these stocks (assuming she handpicked a number of stocks).
ReplyDeleteTwo weeks? Back to the basics. Investing vs. speculating. But she's not alone. So many confuse these terms!
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