Beyond Buy-and-Hold # 42
You?re invested in stocks.
I?m not talking about the money in your 401(k) plan.
I?m talking about your heart.
You?re emotionally invested in stocks.
You have plans for the future . You want to be able to help your kids with their college expenses. If all goes well, you would like to retire a few years early. You?ve been thinking of buying a bigger house but your thinking would tilt toward a ?yes? if your portfolio performed well over the next few years.
Money is the fuel you use to power your effort to live a more fulfilled life. When the voice on the radio says ?stock prices fell hard today,? the words you hear are ?your hopes for the future fell hard today.?
The emotional impact of stocks?and more
Actually, it?s more than that.
You started investing in stocks in the early 1990s. After doing well for several years, you managed to persuade your best friend to get into the market. He was grateful to you when he doubled his money in the late 1990s. You wonder sometimes what he is thinking about your advice now. You were smart for as long as stock prices soared. Is he now starting to wonder if perhaps you were more lucky than smart?
It?s not only your heart at stake here. Your ego is at stake.
And your pride.
There?s your wife. She doesn?t bother with investing stuff. So when she said that stock prices just seemed too darn high to her — ?What goes up must come down,? she would say — you told her she was being silly. You read Money magazine. You read books by John Bogle. You visit web sites that teach you how stocks are always best for the long run and that there is no such thing as a free lunch and that timing never works. What could she possibly know about the subject that you don?t know about it?
So it annoys you to see the case that she was right all along grow stronger and stronger.
And then there are your kids. They asked questions about the stock market a few times and you explained all the stuff you learned on the web sites. When you heard yourself say it out loud, you detected a bit of doubt in your voice. Was that you way of signaling them that there is a bit of b.s. in all the marketing pitches? Or do you really believe?
What do you really believe about stocks?
Who knows? Belief in Buy-and-Hold has become a habit. You?re not sure today why you came to believe in it. You just know that you do.
Your confusion stems from the fact that it was never your mind that was convinced of the merits of Buy-and-Hold. It was your heart and your ego and your pride. You?re emotionally invested.
None of this makes you bad or dumb. It makes you human. People have fallen for these sorts of marketing pitches before. They work. They persuade people to buy stocks, more than they would if they were thinking clearly about what they were doing. That?s why The Stock-Selling Industry always returns to them.
Please don?t go change your investing strategies because of anything I say. I?m some guy who posts junk on the internet. My claim to expertise in this field is that I figured out what buttons to push to make my words appear on your computer screen.
If you?re not sure, though, this is the time to be thinking things over. They aren?t going to give you your money back if you decide after getting to the other side of the next crash that it was all a mistake.
Are you invested in stocks today because you truly believe that makes sense? Or is it that you are emotionally invested?
You know the answer to that one. My hot investing tip to you is — Be honest with yourself.
The price for having permitted yourself to become emotionally invested in stocks gets higher with each price crash.
Rob Bennett writes about how to achieve career change after 50, among other topics. Rob?s bio is here.
I have a good portion of my retirement in my SIMPLE IRA at work. I am offered basically three choices, cash, bond funds, and mutual funds. I don’t want to invest in cash because it is only making .01 percent, I don’t want to invest in bond funds because when interest rates rise, the value will go down, so I end up putting everything in stocks. What other choice do I have?
Thanks for stopping by, Norman.
You might want to check out this earlier column titled “What Should You Invest In If You Are Afraid to Invest in Stocks?”:
http://outofyourrut.com/blog/2011/05/18/what-should-you-invest-in-if-you-are-afraid-to-invest-in-stocks/
It might be that, when all factors are taken into consideration, you would be earning a lot more than you think on money that you invested in cash-type investment classes.
I certainly wish you you the best of luck with all your investing strategies regardless of how you elect to play it!
Rob
Hi Norman–To follow up on Rob’s point, “cash” isn’t about return–it’s about capital preservation. It satisfies the first rule of investing, which is “don’t lose money”. Too many investors frown on cash because of poor returns, but if the market takes a big slide, .01 will look like a pretty good place to be.
Cash, it seems, it only a good place to be in retrospect. That’s too bad because it really does serve a critical function, especially when stock prices are looking a little heavy. Considering that market has risen from DOW 6600 to the 12,000 range in only a little over two years, this is looking like it might be one of those times.
Not only will your money be safe in the event of a sell off, but you’ll have cash available to scoop up bargains, which is yet another of cash’s virtues.
The key is being able to predict your stock return.
If you can predict your stock return, you just compare that return with the return you would obtain from cash, and see which is the better choice. Investing is easy and profitable for those who can predict their stock return.
There is now 30 years of academic research based on analysis of 140 years of historical stock-return data showing that it is possible to predict your long-term (but not your short-term) stock return with a reasonable amount of accuracy.
So why don’t we see thousands upon thousands of articles showing us how to do this and imploring us to do it before putting money down on the table?
The profit that goes to the financial industry when you buy certificates of deposit or IBonds is small. The profit to the financial industry when you buy stocks is huge. That’s why.
There are hundreds of millions of dollars to be made trying to persuade people that the 30 years of academic research is wrong and that there really is some funny reason why it’s not possible to know your stock return in advance. The idea that “timing doesn’t work” has made lots of people very, very rich, Norm. My concern is that, unless you work for The Stock-Selling Industry, you are not one of those people.
If anyone reading these words has ever seen a study showing that long-term timing doesn’t work, I would very much like to see it. I have been asking for a link to this “study” we are always hearing about for nine years now and no one has ever supplied one. The most common reaction I hear when I request a link is a demand from a Buy-and-Holder that I be banned from the board or blog at which I am asking this dangerous and rude question. It would be fair to say that I have serious doubts at this point whether such a study exists.
I never went to investing school. I never managed a big fund. Please don’t go by anything I say. Check this stuff out for yourself. I am just an ordinary middle-class investor letting my friends know what I have learned from my nine years of investigations. I have learned that the words “timing doesn’t work” are just a marketing slogan. There is no “there” there. And many millions of good, hardworking people are today suffering a great amount of financial misery because they took these marketing slogans seriously.
This is one guy’s opinion, nothing more and nothing less. Lots of good and smart people think I am wrong. There are more who think I am wrong than there are who think I am right.
Rob
I checked out the earlier column you linked to and I think I’m finally starting to get what you are saying. Rob and Kevin, I appreciate your responses to my question and I believe it is time to take some action with my investment allocation.
That’s super, Norm.
Please do take seriously the part where I say “lots of people think I am wrong.” You need to consider both sides of the story before making a decision as to which way to go is best for you.
I wish you the best of luck with it.
Rob