There’s an old story in the investment industry that may be true or may be just a parable--but it certainly is appropriate to remember when the stock market is panicking.
The story goes, a very smart advisor would tell each of the investors who opened an account with her the following:
While that’s a good story, and one we tell often, it’s not the whole picture. If you wait for the perfect time to invest, you’ll likely miss many, many, days, weeks, months, or even years of good growth in the market.
We believe a better answer to the “When is the perfect time to invest?” question is: “ASAP”.
The magic of compound interest works best for you many years down the road. Every day you delay is a day you put off that magic coming to fruition. Not to get into the math, but you can imagine that 21 years of compounding growth produces a higher number than just 20 years of compound growth. If you take the time to do the math, you might be amazed at what one extra year of compounded growth means in dollar terms.
And my answer of as soon as possible also comes with some conditions.
Get a financial plan.
Developing a real financial plan means understanding all, or at least most of, the risks equity investing presents. Knowing the correct asset allocation is paramount. Too little risk and you may have no chance of reaching your goals, too much risk and you’ll find yourself outside our window with a rock in your hand.
Having a real financial plan gives you discipline, and in investing, discipline is your friend. A real financial plan gives you confidence that no matter what happens in the short-term, you will be okay in the end.
A real financial plan makes life simpler. If you find yourself with extra money to add to your portfolio, you don’t have to reinvent the wheel or come up with some new idea. Your plan already shows you where your money should go. If stocks soar, your plan will tell you when to pull back; if stocks sink, your plan will force you to make the hard decision of “should I buy more”.
A real financial plan provides a more tax-efficiency investment strategy, which gets you where you want to be faster-- and with less risk. Investing with poor tax planning is like driving your car with the parking brake on-- it slows you down and ruins your car.
If you don’t have a plan, it’s unlikely you have done an adequate job of educating yourself about how markets and money work either.
Folks often fail when they follow a “get a hunch, bet a bunch” strategy. Sure, you hear stories of someone who bet all their money on some company you have never heard of and made a fortune. You have also heard stories of folks who won the lottery and became rich overnight; that doesn’t make buying lottery tickets a sound investment strategy.
So, while I love the story about the brick, I think it misses the bigger picture. Planning, and executing your plan, will create the perfect time to invest. Remember, it wasn’t raining when Noah built the Ark.
You know Lake Wobegon from NPR and Garrison Kielor. It is the mythical place where “all the women are strong, the men are good looking, and the children are all above average.”
Unfortunately, we cannot all be above average. However, if asked we will generally claim that distinction no matter what the subject, and this can lead to behavioral mistakes that cost our bank accounts real dollars.
In finance like other areas of your life, try to play to your strengths and recognize your weaknesses. If you lack patience, the stock market is no place to learn. If you like taking risks, the markets will let you take plenty, and then send you home with nothing. If you are timid, you could easily talk yourself into staying on the sidelines- the ultimate financial mistake.
Work with an advisor who helps you use your strengths and fills in for your weaknesses. It is not always about the opportunity, sometimes it’s about our attitude.
Stole that headline from Twitter. Originated with someone named Allen Kuhn. I don’t know Allen but that is a catchy snippet. One hundred and forty characters doesn’t tell much of a story so I will just guess what Allen was thinking.
These were all on Yahoo finance today.
This could send gold tumbling below $1,000 again, Citi says – Citi doesn’t know which way gold will trade next, but they know you are scared.
Hedge funds dumped Apple, and bought this stock instead – Hmm Apple was a great investment for a long time and now these guys have found a replacement for Apple in my portfolio! Holy iWatch, Batman! Jump on it!
Top 3 American Century Investments Asset Allocation Mutual Funds (TWSAX, TWSMX) – Wait, what? You said three, this is only two and they both have above average fees.
A brutal remark from a high-speed trader tells you everything you need to know about where Wall Street is headed – and my crystal ball says they are all wet.
“If Johnny jumped off a bridge would you jump too?”, said every mother ever. Just shows how pervasive the herding or follow the crowd instinct is. Like bison on the prairie we seem to move as a herd. While there is safety in numbers, sometimes the herd mentality is detrimental to us and our finances.
Native Americans took advantage of the herd mentality by starting a stampede among the herd of bison and driving them off a cliff as the herd panicked. So it goes with stock market investors sometimes. We all get spooked and run for the exit at the same time and some of us invariably end up at the bottom of a precipice.
Or, just as dangerously, we all sense the opportunity to make a fortune and pile into the same stocks at the same time until, the last fool climbs on board. Then when there are no more fools to jump into the boat it sinks from the weight of the herd.
Cognitive biases are mental shortcuts that helped our ancestors survive in a hostile environment. In the modern world these deeply ingrained shortcuts can be dangerous to our financial wellbeing. Although it is impossible to purge your psyche of these biases, if you are aware they exist you have a better chance of overcoming the urges they bring and making more rational and profitable decisions.
If you haven’t heard of Bill Ackman before then good for you! You’re out living your life and are not too plugged into CNBC. Bill Ackman is a hedge fund manager, he is a really smart guy and made a lot of money for his investors…until recently. His big bet on pharmaceutical company Valeant has become an epic fail, with the stock price cratering from a high of $261 in August of 2015 to around $34 per share less than a year later. That is shedding over 85% of the company’s value.
So how can such a smart guy turn so wrong so fast? And, what can individual investors learn from Mr. Ackman’s fail?
1) Don’t own enough of any one thing that you can make a killing or be killed by it. Diversification is the investor’s best friend. You do not have to be a stock picking genius like Bill Ackman to grow your wealth, you just need to have a properly diversified portfolio that you can stick with through thick and thin. The magic of compound interest and the inexorable march of the stock market will do the rest.
2) Don’t announce to the world that you own stock in a company that you see as a big winner. Bill Ackman was often in the financial media, talking up the positives of Valeant. Maybe it started by Ackman being a little greedy and talking up a holding, but over time it seems to have morphed into a story he believed. If you publicly say XYZ is the best thing since sliced bread, you will paint yourself into a corner of having to admit you were wrong if things don’t work out, and people hate to admit they were wrong about anything! So Bill sees that Valiant stock is cratering, but rather than admit to being wrong he stubbornly refused to sell until most of his money has disappeared. From here it will take a gain of over 600% for him to get back to a valuation equal to the August of 2015 level. How many years of stellar returns does it take to gain over 600%? Not even Bill Ackman is that good.
3) Don’t invest in companies that are built on shady dealings. Like the banks that derive too much of their profit from the fees they charge their small customers, Valeant Pharmaceuticals didn’t have a legitimate economic model. They bought companies and drug rights with the sole intent of price gouging their customers. If they would do that are you really surprised they would cook their books too? Companies that understand they are also citizens of the places they do business tend to build the best business model for the long run. Companies that are shady like the Pharma Bro i.e. Enron, Lehman Brothers, Arthur Anderson, eventually are rewarded appropriately for their behavior. There are too many good companies available to choose one built on cheating.
Sorry, Bill Ackman. We are only human.
The old prayer goes…”God grant me the serenity to accept the things I cannot change, the courage to change the things I can, and the wisdom to know the difference.”
You cannot change the markets; they have a life of their own. But you can change the way you see them and the way you react to them. Enter with caution, have the courage to stay. Know that your fear is usually irrational and have the wisdom to overcome your panic. Patience will bring the serenity.
It is always amazing how stock market tops attract so many investor dollars. Just when things are at their riskiest point flows of funds into stocks skyrockets. We convince ourselves that the part will last forever and we hate being left out.
The flip side is the head scratcher of a down market, where no one wants to buy even though prices are marked down 10%, 25% or even 50% on rare occasions. If this were a department store the aisle would be overflowing with bargain hunters. Yet when it comes to investments no one wants to shop the markdown rack.
If you are feeling confident you should stop and think deeply about why. If you are feeling scared, then it is likely time to go shopping.