September 25, 2017
Monday AM

(SitNews) Ketchikan, Alaska - Well, the Dow Jones Industrial Average (DJIA) has again hit an all-time high, so the buzz that we are now hearing is that “now is the time to get out”. And, although it may be ok to take some profits, that does not mean that you have to get out entirely. No, indeed! Getting out, then back in at some time down the road, is the wrong way to go about this job of investing. You may disagree; quite a few people will disagree, in fact. However, they are wrong.

The US has been enjoying a very long-running bull market for almost a decade now. In spite of some ups and downs, which are normal in any market, the overall trend has been upward. Since 2008-2009 and following the crash of tech stocks, most sectors of the US stock market have done very well, 2013 in particular. Several of the last 9 years have produced great market returns, and 2017 may finish with good returns as well. Given the fact that this is, indeed, a pretty long period of time for great returns, many investors are wondering if it is about to come to an end, with a bear market just around the corner. If that happens, the question always gets asked: “is it time to get out of stocks?” Or, sometimes the question gets posed as: “is it time to go to cash?” This is not an unreasonable question to ask, so the purpose of this article is to explore this in some depth and come up with a reasonable answer.

Keep in mind that almost all investors do know that markets always cycle up and down, which would infer that they realize that sooner or later a bull market will turn down and we will enter a bear market of some kind. The question is never whether or not the market will turn down (or up), but what you plan to do when it does. Get out? Get in? Stay the course? How do you decide what to do? How do you protect what gains you may already have?

The answer is that you should already have a strategy firmly decided upon before you invest. Just getting into the market is only the beginning. When stock market returns are great, a lot of people get infected with the greed factor and jump on the bandwagon, expecting to make a big return, fast. Being motivated by greed is not a good start, however. Once you are in, you cannot avoid the question of what to do if/when the market changes. Every investment plan should include a “what if” strategy. What if the market goes sky high? What if it crashes 30% overnight? What if it begins a gradual decline of a few percentage points per week? What if it swings wildly back and forth, up and down, in a chaotic roller coaster ride? What is your plan?

In order to be successful in the stock market, a smart investor has to focus. Focus on the LONG term, which invariably includes all of these “what if” scenarios. Roller coaster rides, major crashes, sky high share values, gradual declines and gradual gains. All of it. A smart strategy works in all of these conditions.

One thing a smart investor does not do, or include in his/her investment strategy, is to attempt to time the market. She does not jump out or go to cash when the market takes a dive, or jump in, anticipating that it will soar upwards. She does not attempt to “call the market” by predicting that a bull or bear market is just around the corner. Over and over again, this has been proven to fail, largely because no one knows for certain when the market will move in either direction. There are just too many reasons for the market to move up or down, some which are totally unpredictable, for anyone to know in advance when it will do either. I know that some people have claimed to be able to do this, but those claims have been proven to be false. Furthermore, those claiming to have achieved this are usually just trying to sell their own market timing schemes to unwary investors.

That takes us back to the question of what to do. A good investment plan starts with a goal and a timeline. For example, your goal may be retirement in 15 years. That establishes a reason to invest and the timeline for meeting the goal. The next step is to set up a strategy that is designed to meet that goal in 15 years. Identifying the roadblocks you will face, and the risks involved, are part of the strategy as well. If you very conservative, you will want to take fewer risks, of course, but you first have to know what they are. It won’t work to guess at this. You need to be realistic and specific.

Most investors will need some professional help determining the amount of investment they will need to make, how often they will need to make those investment contributions and what kind of returns are reasonable to expect over that period of time. With this information, the investor will know if she can reasonably expect to reach the stated goal or not. If not, she can decide how to solve that problem, either by working longer, investing larger amounts, taking more risks in an effort to get better returns or some combination of all of these. Professional help with this part of the planning process is particularly important, because these issues become fairly complex and frequently involve sophisticated strategies that are difficult to implement without specialized education and training.

So, that takes us back to the strategy question of getting in, getting out and what to do “when/if”. For example, a 15 year goal for retirement could use a strategy that will get him in gradually, with ongoing investments, probably monthly or more often, in a diversified basket of funds that closely match his tolerance for risk. His strategy could be that he will not get out when the market drops but he will get in every time he gets paid, sometimes more frequently if she has extra money to invest. With this strategy he will take advantage of the market swings by “averaging down”, buying shares at all levels of prices, high and low, in all kinds of markets, avoiding the issue of when to get in and when to get out. With this strategy, the investor will begin to make withdrawals at retirement which are calculated to last as long as desired, usually for life, and will never get totally out, staying permanently invested. The strategy for another investor may be quite different, because it may use up one source of funds first and switch to another over a specific time frame. For example, a 62 year old retiree may decide to wait until age 70 to begin taking his Social Security retirement benefits, but start taking from his IRA from age 62 to age 70 and then take a combination of both at 70. The bottom line is that there actually is a well-thought-out plan for contributions and withdrawals, not just one or the other. A good investment plan includes a withdrawal strategy as well as an accumulation strategy.

For an investor who has a lump sum to invest rather than ongoing contributions from earned income, the problem is more difficult to solve, but it is solvable. If the market is volatile, many people will get in the market in increments, over months rather than all at once. Incremental investing does not guarantee any advantage but it does give the investor more time to get shares at varying prices in an effort to average them down as well. It may or may not work but it is a reasonable strategy, since share prices do fluctuate up and down in most market conditions. It also sets up a strategy to avoid the mental angst of trying to time the market, which we already said does not work. Knowing this, the investor with a lump sum is also tasked with thinking long term, starting with the lump sums being invested on any date and waiting until the end of the time period, which may be a certain number of years, or a lifetime. If it is a lifetime, such as “the rest of my life”, the strategy will be to preserve the principal as long as possible, produce enough income to satisfy the investor’s goals and do so without taking more risk than is reasonable for that individual. As previously stated, this usually does require some professional help, since it involves sophisticated skills to implement and maintain. It helps investors to know the concepts behind these issues, however, because knowing them enables most people to stick with the plan.

Sticking with the plan is hard for a lot of people. They may simply be so action oriented that they believe that they need to “do something” when the market moves up or down. This is not true, however. That sort of behavior usually destroys the plan, messes up the strategy and shoots the investor in the foot, so to speak. Sticking with a plan, assuming it is a well thought out and sensible plan is how to avoid the dilemma of “what if”. It sounds so easy, but it is not. We are emotional creatures, and respond to all kinds of events, including money events like stock market ups and downs, with emotional impulses. The best financial plan and the best investment strategies are straightforward, individualized and designed to keep the investor on track, matching goals with the least amount of risk and the most reasonable expectations possible. Easy to say and hard to do, for too many people.

So, is it time to get in? That depends on how long you have to invest. More than just a few years? Probably yes. Is it time to get out? Why? Do you need all of the money for a purchase you must make now? That is unlikely, but if you really do need all of it now, you have no choice but to get out, regardless of whether the market is up or down. When this happens, it is usually the result of poor planning.

However if you are like most people, you do not need all of it now, so you will not want to get totally out. Do you simply need income to last a certain amount of time? If that is the case, you may want to move some (but not all) of your shares to cash for enough income to last that period of time, such as 6 months, or a year, or whatever. The balance will stay invested, so the answer is that many, if not most investors, may never totally get out of the market. Yes, you probably will not spend it all, and this is a good thing. By contrast, this is good planning.

Often when this subject is discussed, we hear the argument that you should accumulate a certain amount of money for retirement, or whatever goal you have, then when you get to that amount, take the cash and set it aside in a guaranteed account somewhere, like a bank CD or something similar, to be certain to safeguard the principal. Is this correct? Probably not, and here is why: when you do this, you are forgetting about inflation. Money that is in a guaranteed account will earn less than inflation almost evert year, making it worth less in buying power over time. It is like watching the pile of dollars get smaller and smaller every year. Your goal should not be to see your dollars go down in value; they should be going up, on average. Inflation erosion is a risk that is regularly ignored by a lot of people who are unwilling or too greedy to take even reasonable risks. A desire for absolute guarantees at all times is fear so great that it is correctly considered a form of greed. It is also not a good investment strategy. Any strategy based on emotion is bad for a long term investor.

But wait, you say! What if you needed $1 million but somehow managed to end up with $5 million? Wouldn’t it be ok in that case to put it all in an account like a bank CD, avoiding all market risks, and just live on it? Well, maybe and maybe not. To know the answer to that question, you would need to calculate how much you intended to spend annually and how long you expect to live, then factor in the rate of inflation to determine how fast your dollars were declining in value. It is neither safe nor smart to simply guess or assume. In some cases, you might be ok, but surprisingly, in other cases you would actually run out of money. I say this with confidence because over the last 33 years I have seen it happen to people who do not plan or pay attention to the numbers. The reason you might run out of money is that you have to spend more on things every year due to increases in prices (inflation!), and if your rate of increase in spending is more than the return you are getting on your money, you are digging a hole that uses up your cash faster than it should, and you run out of money.

In the grocery store recently, I was standing next to a man in front of the bread shelf and he said loudly “At this rate I will soon have to stop buying bread and make my own”. In another example, I was talking to an acquaintance who said that she thought her pension would be enough and it was in the beginning but now she did not have enough to cover her regular expenses and was having to cut back on things. This is due to inflation, and perhaps a failure to keep their money invested for returns that were better than inflation. They sought guarantees, and got them, but that isn’t enough.

What will works for one person may not work for another. One thing is constant, however; if you are going to invest in the market, you should stay in it indefinitely. If you do not do so, you will invariably miss the highs and lows. If you are a long term investor, you will need both, not just the highs. You will need the lows to average down your share costs and the highs to average up your withdrawals. Long term investors will experience both of these as our economy goes through the usual up and down market cycles, so take advantage of both by staying in the market

At the beginning of this article, we asked the question about when to get out if you believe the market is near or at an all-time high or about to crash. The problem is, however, that you also have to ask, at the same time, when you will get back in, and you won’t know the answer, so the question becomes useless. A long-term investor does not need to get out, because long term investors do not need to time the market. Indeed, they need highs and lows in order to succeed. In addition, in order to preserve your money when it is time to begin withdrawals, the unspent principal needs to beat inflation in order for your money to last and cover the rising costs of everything, so you need to stay invested in order to beat inflation. Staying invested eliminates the pressure to get out and then back in later. Trying to pinpoint the highs and lows is not possible on a sustained basis, so it is not smart to attempt the timing. Besides, there are better strategies than trying to time the market.

We also addressed the issue of when to get in, with the best strategies for getting in with a one-time lump sum or getting in gradually over time, depending on your age, circumstances and tolerance for normal market risks. Again, although smart money does often take advantage of market declines to add money to a portfolio of shares, it is not the most important element in choosing when to invest. Studies show that a more important element in a successful long term investment strategy is how the portfolio is diversified among types of investment classes, such as sectors of the economy, big, small or medium sized companies and investments that are different one from the other. This strategy is called “asset allocation”. It is a key factor in long term investment success for any investor.

In summary, don’t try to time the market. Yes, it will eventually take a dive downwards. That is not the end of the world. In that case, if you have some extra cash, invest it and be happy to have gotten some shares at bargain prices. After it falls, it will eventually rise again and the value of your shares will go up. Yippee! Down, up, down, up. Bottom line: stick with your plan. Don’t have a plan? Well, get one. You should not expect to reach your destination without a roadmap, so stop winging it. Avoid letting your emotions rule your financial decisions and become a smart, committed, long-term investor who has a plan and knows how to stick with it.

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©2017 Mary Lynne Dahl, CFP® is a Certified Financial Planner ™ and partner in Otter Creek Partners, a fee-only registered investment advisor firm in Ketchikan, Alaska. These articles are generic in nature, are accepted general guidelines for investment or financial planning and are for educational purposes only.

Mary Lynne Dahl©2017

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