September 20, 2009

Where Are You Getting Advice? Timing the Market?

I spent last weekend and the first part of this past week in San Diego with 1,200 other investment advisors at the annual Schwab Impact conference. It is always good to getaway to hear from various corporate and political leaders, economists and analysts, and other advisors. I usually come away a bit sleepy but full of energy, and this year was no different.

The past year has been one for the history books, and most of my colleagues and me have learned quite a bit I believe. I was preaching diversification before, and I continue to preach it. I was saying to continue to contribute to your 403b (or 401k) which allows you to dollar cost average, and that is still the way to go. These are not new interesting ideas, but they make up some of the foundation of investing.

In my discussions this past week, I heard that some advisors are seeing an "uptick" in the number of "financial advisors" trying to say how they can "time the market" and get in and out at the top and bottom. When you hear this... be very, very cautious. It is always easy to say whatever, but the reality may be somewhat different.

Timing the Market

Yesterday I mentioned that sometimes I am told that a friend/relative/neighbor sold out at the top and bought in at the bottom (in the past it has always been the "hot" stock). This is almost impossible to do. In fact, I have had numerous people ask when is the market going to go back down so they can get in again. After talking to most of these people, they generally have sold out at the very bottom of the market.

In a post this summer, I discussed "capitulation" as when investors have had enough, throw in the towel, and flee the market. Unfortunately, this is usually what most of the people waiting to get back in did. Not all of them but a majority of them did this very thing. I definitely understand it.

If you are still sitting on the "sidelines" waiting for the market, you are taking a big risk there too. Wherever your money is just sitting waiting, there are risks there too.

  • Inflation Risk - The possibility that inflation will rise thus decreasing the buying power of a dollar.
  • Interest Rate Risk - The possibility of a reduction in the value of a security, especially a bond or CD, resulting from a rise in interest rates.
  • Principal Risk - The risk of losing the amount invested due to bankruptcy or default. There is always the possibility that through some set of circumstances, invested money will decrease or completely disappear. In this case, principal is lost, not just profits. Even with CDs, this is a risk if you go over the FDIC limit.
  • Opportunity Risk - The risk that a better opportunity may present itself after an irreversible decision has been made. Example - Buying a 5 year CD at a nice rate now, but if rates rise substantially after even 1 year, you will get hit with a penalty to break the CD and start over.
All of the above are not meant to scare anyone to move, but to point out that every decision has a bit of risk involved. If you jump from one thing to another, you are creating even more risks for yourself.

My wife has a saying, "Plan your work. Work your plan." Simple I know, but it lends itself here too. Where do you want to be? How are you going to get there? What are the risks involved? These are just part of what advisors try to think about every day for our clients. Are you thinking about this? Is your advisor?

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