Obvious and Logical

Good Morning Relaxing Retirement Subscriber,

Several years back, I was watching a New England Patriots football game with my son Michael and his good friend.  I believe they were about ten years old at the time.

The Patriots’ offense was on the field, and it was second down and only about a yard to go for a first down.  Like many teams, they attempted to run the ball up the middle, but the opponent’s defense responded well and stuffed the ball carrier behind the line of scrimmage.

On third down, the Patriots did the same thing, except to the right, with same exact result.  The defense held its ground, and Belichick had to decide whether to go for it on fourth down.

Frustrated, Michael’s friend blurted out, “I don’t get it.  Why don’t they just go around?”

In other words, why do they keep running into the teeth of the defense.  Wouldn’t it make more sense to try and run the ball outside and around the packed-in defense?  (I wonder if Belichick was aware of this strategy?)

Without knowing very much about football, and the strengths and weaknesses of each team, this recommendation appeared to be such an obvious and logical strategy to him!

Obvious and Logical

The same is true with respect to investing and stock market corrections.

Why would anyone just sit there through a downturn in market prices and “lose” money?

Wouldn’t it be logical to simply sell out, wait for the dust to settle, and then buy back in so you don’t suffer losses, i.e. classic market timing?

For clarity, Market timing is the strategy of attempting to sell in and out of markets on a timely basis in order to avoid large short-term losses and capture all upside gains.  This stems from the commonly held belief, which is perpetuated by the financial media, that investment success is achieved by the few who are “in the know” who are able to successfully “navigate” in and out of markets at just the right time.

It’s sounds 100% logical.  Unfortunately, however, what sounds obvious and logical from afar doesn’t necessarily work in practice.

History is littered with proof that this belief is false.  Noted Professor Kenneth French’s extensive research concluded that you would have had to be precisely correct on the sell and buy points 74% of the time in order to equal returns earned by continuously holding shares through all market cycles.

And, that a survey of famous market timers revealed that only a handful were correct more than 50% of the time, and the best was still at only 66%!

October 2007 to March 2009

History and distance from traumatic times have a way of providing clarity for future action.  However, at first glance, that’s not always true with investing.

Now that time has passed and markets have not only recovered but continue to reach new highs, the market downturn we experienced over 18 months from October, 2007 to March, 2009 appears to be a period that anyone and everyone should have been able to navigate in and out of successfully.

What we all forget with time, though, is that we didn’t experience that 18-month period of time in one instance.  We experienced it one day, and in some instances, one hour at a time.

From October 10, 2007 to March 9, 2009, broad stock market prices fell over 50% on average.

However, it was not a straight line down that was obvious to interpret and act on.

Experiencing Markets on a Daily Basis

During that 18-month timeframe, if you recorded market results on a daily basis, here’s what you would have experienced:

  • Market prices closed up 46% of the days, and
  • Market prices closed down 54% of the days

Isn’t that incredible!  During the 18-month period of time when market prices fell over 50%, market prices closed up about 173 days (46%) and down about 202 days (54%).

I’m sure you expected it to be much worse than that with a much larger percentage of down days.  (For reference, from 1973 through 2015, market prices were up 53% of days, and down 47% of days.) 

So, as we experience markets on a day to day basis, that 18-month period wasn’t that different than the average.

What this demonstrates is that, when dealing with markets, our experience is never a straight line up or down.

Instead, it’s more like: up one day, down the next, down the next, up the next, up, up, down, down, down, up, down, up……

That’s how we experience markets, and that’s what makes market timing impossible as a long-term strategy.

You not only have to make the correct call to sell out, and then to buy in on the correct days, but you have to make those calls at precisely the correct time during each day because prices change all day long.  (And, because all asset classes behave and perform differently, you have to make those split-second decisions on each asset class you own.)

Just think of markets in the fourth quarter of 2018 when the price of the S&P 500 Index fell sharply by 19.8% through Christmas Eve, only to turn around on a dime with prices rebounding back to previous highs only three months later in early 2019.

Although it feels as if there was throughout time, there is never a clear and unquestioned signal in the moment when a decision must be made to sell or buy.  Never!

That’s why buying into the belief that you can successfully time when to get out and when to get back in is so destructive to your financial independence.

Put It in a Drawer

After you have set aside a bare minimum of five years’ worth of your anticipated withdrawals to support your lifestyle cashflow needs outside of the short-term volatility of equities, i.e. in money markets and short-term fixed income holdings, the long-term solution with the rest of your Retirement Bucket™ is to remain globally diversified and strategically weighted across several asset classes during all market cycles with a goal of capturing the higher expected returns each asset class offers.

And, then “put it in a drawer” and go about living your life. 

Go ahead and pull it out of the drawer during pre-determined periods of time, i.e. once a quarter, half year, or yearly, and rebalance your holdings back to your originally prescribed mix.

However, as we have just highlighted, do not delude yourself into thinking that looking at it on a daily, weekly, monthly, or even quarterly basis will make you more knowledgeable, provide you with any signals to act on, or produce better results.

What this allows you to do is remain confidently invested for the rest of your life knowing you will not be forced to sell your long-term equity holdings during a temporary market correction in order to provide needed cashflow to support your desired and well-earned lifestyle.

Committed To Your Relaxing Retirement,

Jack Phelps
The Retirement Coach

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(The content of this letter does not constitute a tax opinion. Always consult with a competent tax professional service provider for advice on tax matters specific to your situation.)