What’s For Dinner?
Ok, let me set the scene…
Your spouse, your significant other, your friend, your sibling, or someone close to you says, “Let’s go out to dinner tonight! Your choice, just say where…”
For the next few minutes, you list off ideas one by one, and your counterpart shuts down each of them. Sometimes with a “Nah,” sometimes just a look of disgust, and sometimes with a “Didn’t we just go there?” Until you finally feel defeated and surrender with the response, “Where do you want to go?”
In these situations – which I am sure some of us are very familiar with – we learn that an introductory promise of “your choice” really isn’t the case.
Oh, I Would Never…
In personal finance, I often experience a similar head fake. A client or potential client will introduce a conversation by telling me how foolish it would be to try and time the market, how market timing is an impossible endeavor – as I am shaking my head saying, “Yes, yes, that’s correct” – and then they proceed to tell me their plan. What’s their plan? To take a stab at some variation of market timing.
It sounds like this: “I know market timing is a fool’s errand, and I know it’s impossible to know the future, but here’s what I’m thinking… There is so much unknown out there right now, I think I’ll wait until markets settle a bit” or “I’ll invest after markets pull back a bit” or “Until this geopolitical unrest is settled” or “Until this jobs report is published” or “Until this election is over.”
How am I to respond? They know I don’t put any faith in being able to successfully time markets. Think about it, if I was a successful “timer” once, God knows I couldn’t do it again (be consistent), and if I could, I sure wouldn’t let anyone in on my secret. I’d just sail off into the sunset with my billion-dollar timing skills.
My Bad?
So, going back to our analogy, what if I did convince you to try that Indian restaurant that you cringed at when I made the suggestion the first time? You decide to give in and give the restaurant another try. You end up with WWIII in your stomach, and who will you blame? Me, of course. And how about if I suggest you begin to allocate money into the markets after you initially resisted the idea and showed some hesitation? Next thing we know, markets start to misbehave, as they often do, and who will you blame? Me, of course.
Here’s the problem, market timing (speculating) has much to do with achieving favorable entry points, which feel GREAT in the short run. On the other hand, investing is a long-term endeavor in which entry points aren’t as important as the benefits you glean from long-term compounding.
Time Dilution
The Great Financial Criss was the worst market event of your lifetime, the most catastrophic market occurrence since The Great Depression. Investing a lump sum of money on January 1st of 2008 would’ve been very unfortunate and, in hindsight, horrible timing… in the short run, that is. Your investment returns in the first year would’ve been the worst single-year return for markets in the last 50+ years. Now, fast forward to today, and what do those annualized returns look like starting from January 2008? Nearly a 10% annualized return – in the context of history, an above-average rate of return.
All this to say, great or unfortunate entry points are diluted over time. This is why it’s key to understand the appropriate time horizon for each portfolio allocation. In financial planning, we match financial goals with financial investments, and the time horizon helps us best pair allocations and goals. Stocks are meant to be long-term (10+ years) investments, which are best paired with long-term goals. The issue is that investors obsess over entry points, and they often prematurely judge their long-term investments.
Order Up
Imagine it this way – you are a contestant on a cooking show, and there will be three judges that assess your food based on taste, difficulty, and presentation. You are given 2 hours to prepare this contest meal. You are 7 minutes into the competition when you realize one of the judges is standing over your shoulder, asking to taste a sampling of your meal. This is a laughable request, right? Why? Because the judgment period doesn’t match the meal’s time horizon. Yet, we commit this same cardinal sin in investing all the time. We let the short term dominate our financial thought life, and we lose focus on the benefits of long-term compounding – which is accompanied by a whole lot of volatility along the way.
Don’t mishear me, though – I am not advocating for hope as a strategy. I was recently accused of this with the following question, “Do you plan to invest my money during all of this market turbulence and just hope for the best?” The answer is no. Our team bases our recommendations on what market history has shown us, and the probabilities revealed from studying that market history. Recommendations regarding allocations (portfolio design) are based on the objectives of the financial plan and, as mentioned, matching each investment’s time horizon to the time horizon of each financial goal.
As a financial advisor and a guide, it’s my job to craft a financial plan that helps you achieve your goals AND one that you can stick to. Remember, investing is both an art and a science. The probabilities we lean on are the science part; this is where we try to calculate how to optimize outcomes best. The art portion of the equation is you. You, a human being, with emotions and the free will to do whatever you’d like. This is why sometimes we will dollar cost average into a portfolio versus lump sum investment. This is why we might ramp up the allocations to less volatile assets to tone down the expected fluctuations to something you can tolerate. The behavioral factor must be considered when creating a financial plan/portfolio. Psychological safety and comfort are critical components of successful investing.
You Are In Good Company
So, yes, I can’t time markets, and neither can you. Our obsession with finding “perfect” entry points is a distraction and a low-priority item when it comes to sound financial planning. Let me encourage you to refocus that energy on how you design your portfolio to best match your financial plan. Furthermore, focus on how you can create and implement an approach you are comfortable with.
As always, I hope these discussions are helpful. We should find comfort in the reality that we all – professional and practitioner included – struggle with the desire to dabble with market timing. Resist this urge, my dear friends, and lean into the foundational truths that define sound financial planning.
Until next week, this is TOM signing off…
