|Source: Capital Pixel|
This, in fact, is one of the best reasons to seek the help of an advisor. Often, I'll find that potential clients have poorly timed the market by buying in after the market has gone up. They then wring their hands and stress out as they watch their portfolio drop, only to sell out at the wrong time. After selling out, they have to watch from the sidelines as the market rises. This, of course, is the emotional roller coaster investors ( I use the term loosely) needlessly ride. And - it is costly!
2011 has been a case in point. I find investors have pulled their hair out as they've witnessed and reacted to 400-point swings in the market by capitulating at the wrong time and seeing now that market indices are positive for the year.
This is the point where they show up on my doorstep.
Some appreciate the advice I give them by acting on it in timely fashion. Others, despite my best attempt, don't. They will walk away and, if the market moves 15% higher, jump in. Basically they will continue the behavior that has been harmful in the past. This, of course, is a phenomema that is not confined just to the financial arena.
Get Into The Market
I'm a proponent of indexing. This makes getting into the market easy. If you have a brokerage account and we meet at 9:30 a.m., I'll have you in the market by 10:30 a.m. at the latest. We won't try to pick stocks or sectors. We won't discuss macroeconomic developments. We won't even try to guess what China and Europe have up their sleeves. What we will do is buy the whole market. If you are with Schwab, we'll buy SCHB. If you are with Vanguard, we'll buy VTI. With others, we may buy IWV. These are all low-cost, broad market exchange traded funds.
The bond portion is just as straight forward. We use low-cost exchange traded funds that are indexed to broad portions of the fixed income market.
How much will we buy? How much in stocks and bonds? This takes a bit of time and collaboration. It is why we might need until 10:30 to get you invested. We'll talk about your goals and take into account answers to other questions on the questionnaire. We'll determine an appropriate asset allocation model that targets a given percentage in stocks and fixed income.
If the appropriate model is 70% stocks but you are very leery of the market, we might start with 60% stocks.
A number of factors come into play, but the bottom line is you'll be in the market.
Some people are wondering what the big deal is. Over the past 12 months ended 12/23, the "Moderately Conservative Benchmark" specified by Schwab returned 3.13%. This benchmark is comprised of 60% bonds and cash and 40% stocks.
In comparison, your money fund probably returned on the order of 0.1%. Even if you had money in a certificate of deposit, you likely earned only slightly above 1%. Thus, the opportunity cost of not being in the market and riding out the craziness that has taken place over the past 12 months has been meaningful. In fact, although the benchmark return at 3.13% is below the rate of consumer inflation over the past 12 months ,it is at least close to tracking it. Money fund performance, in contrast, has been hammered by inflation. This is a risk many fail to appreciate.
As a point of reference, markets over the past 12 months have bordered on the insane with a government that was totally inept, a Europe that has struggled all year with the possibility of a breakdown, China slowing, and a stubbornly high rate of unemployment in the U.S. All of these scary factors and excuses have kept investors on the sidelines and have been costly.
2012 will very likely be just as wild. Should you be in the market?
Disclosure: This post is for educational purposes only. Market returns are unpredictable. Individuals should do their own research or consult a professional before making investment decisions.