The evening news has hit the financial trifecta. We have a credit crunch, a volatile market and the Federal Reserve attempts to starve a recession without feeding inflation. We follow each broadcast and listen to why the market rebounded and then suddenly dropped. The pundits provide explanations that are outdated every twenty minutes.
As the tax rebates start to arrive we scan magazine covers for which funds to own today. Advertisers tell us where to spend our rebates while the financial news tells you the best moves for today’s market. What if they told you to do nothing now? What if you were told that consistently? Well, it wouldn’t be news. If they ran those headlines twelve months in a row their subscription list would drop faster than the Dow Jones Industrial Average after a series of lower than expected earnings.
We seem to live for our daily fix of conflicting information. We have to be on top of the latest and greatest financial news. After all, we never know when we will run into the financial genius who hangs out at the water cooler. You know this guy; he brags about successfully timing the market and that he owns the hottest funds.
Does he own all the coastal property in California? If he could time the market, he would be that wealthy. What usually happens is he misses the best performing days. Does he tell you that he earned 40% less than you did because you basically did nothing and stayed in the market?
A study by Cambridge Associates, an international financial consulting firm, found that if you missed the top thirty days over the nineteen-year period 1982 through 2000 you would lower your return by 40%. Those thirty days represent one-half of one percent of the trading days. Trying to time the market just doesn’t work.
A better approach is to have a basic understanding of financial investments, asset classes, risks and returns. There is a return premium paid in the stock market because stocks have a higher risk. That means their values fluctuate more than other common investments. When it comes to investing, there isn’t a free lunch and the professionals can’t predict the day to day movements. They are happy to charge you for the illusion.
What you do need to know is how much of a loss you can tolerate in a twelve-month period. Wait a minute! Aren’t you supposed to take a long-term view of the markets? Yes indeed but that doesn’t stop us from focusing on what has happened over the short-term.
If you can’t make it past the first twelve months, the odds are slim that you are going to hang in there for a three-year let alone a five-year period. Some of the best managers who have managed to beat their long-term benchmarks have bad years. It often takes three to five years to determine is they have retained their edge. An option to managed account is to use index funds. They are boring but in any given year beat 80% of the actively managed accounts. Push a study of indexing versus actively managed accounts and the odds of the active manager beating their benchmark gets worse.
A monthly article reminding you to rebalance, if it existed, would tell you to recalculate the percentages held in each investment class and see if any of the values have strayed outside your tolerance range. Rebalancing is about selling winners and buying losers. Bob Veres, a writer catering to the financial planning profession said it best, sell high, buy low and remember you heard it here first.
If you don’t know the risk and return associated with each asset class you are going to end up selling when prices decline and put your money into an asset class that is increasing in value. If you sell low and buy high as a way to protect your portfolio, you just missed some or all of the best thirty days over the past nineteen years.
If your asset classes are within your predefined tolerance ranges and your mutual fund manager’s long-term performance has held up to their benchmark you may want to consider doing nothing now. Using index funds can simplify the process. Just remember to use low-cost index funds that accurately track their benchmark.
Rebalancing or doing nothing now requires that you increase your financial knowledge, by-pass the gloom and doom and question the water cooler genius about his long-term performance. If he looks puzzled it is because he doesn’t own the California coastline. At best he missed his benchmarks by only 40%. When you add in his cost of constant trading and chasing last year’s top performing funds, he did much worse but don’t expect him to confess.
The markets are volatile and that is why there is a premium over safe havens that barely keep pace with inflation. Learn what you can about investing for the long-term. It is best to plan on being around longer than next twelve months.
Jim LeBlanc, CFP, has over 30 years of senior level experience in accounting and finance and 5 years of pension investment management. He is the founder of LeBlanc Financial Associates, LLC, and is a National Association of Personal Financial Advisors (NAPFA) Registered Financial Advisor providing Fee-Only financial advice.
Jim and his wife have 2 daughters and 1 grandchild, all living in Arizona. He is an avid reader and writes a monthly financial column for the Sahuarita Sun (Sahuarita, AZ)
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