Remember, stupid is as stupid does ...
With the U.S. equity markets at or near all-time highs, we are beginning to hear a number of warnings about an impending market event. That “event” would be a swift and severe selloff in the equity markets. Now, I know that there are always a number of fearmongers in the market who consistently beat the crash drum. The fact of the matter is that if you remained out of the market for the past five years, you likely qualify for a cameo on the “Biggest Loser.” To quote one of my favorite movie characters, Forrest Gump, “stupid is as stupid does.” But admittedly, stupid can be present on the way up and on the way down.
Market timing is a really difficult thing to get right and many of the smartest have tried and died. The fact is that wealth is built over time using time-tested techniques and separating fear from your money. Markets go up and down based on greed and fear. They rise slower than they fall because greed is a less powerful emotion than fear. Warren E. Buffett tells us that the best time to invest is when there is “blood in the streets.” In other words, the hard decision is generally the best decision.
For those investors who have years in the markets and have successfully navigated through past crashes and bear markets, they know that selling out at the bottom is not the correct move. Buying low and selling high is absolutely key to successful investing, in my opinion. But the most important ingredient is time. Looking back at prior “market events,” I view them as merely buying opportunities surrounded by a lot of fear. Making the same mistake over and over again likely puts one in the poorhouse and is not conducive to wealth creation.
Emotion rarely guides an investor to the right result. Many of the market sages I highly respect are starting to fly the caution flag. They point to stocks such as Facebook Inc., Twitter Inc. and Tesla Motors Inc. that cannot be valued by any traditional method. When stocks become untethered from rational valuation, then generally they end in a very bad event. Those who forget their history are bound to repeat it. In other words, stupid is as stupid does.
A time-tested technique for wealth creation is to manage your exposure to all asset classes using traditional asset allocation methods along with a periodic re-balancing discipline. The key is not to try to time your exposure to the market but to manage it effectively. Don't make the mistake of selling out. It is rational to increase your exposure at times when asset prices are depressed and pare them when the asset class becomes expensive, according to historic norms. The driving message here is that prudent investors should maximize their time in the market versus timing the market.
The bottom line: Deny your portfolio the pleasure of your emotional swings. Is it prudent to pare your exposure to fully priced markets and increase exposure when markets dip? Absolutely, but that does not give investors a free pass to jump in and out of the market. History shows us that investors who jump in and out of the market likely will fail and ultimately cause their wealth creation plan to fail.
Scott Colyer is CEO and chief investment officer of Advisors Asset Management