Missing the big stocks rally: Readers push back
Barry Ritholtz,
Washington Post June 28 2013
Last time, I talked about what investors should do if they sat out the big market rally in recent years. In brief, I advised making changes of both a behavioral and investing nature. The behavioral issues included admitting error, letting go of mistakes, changing news sources, reviewing your process and creating a new approach. The investing solutions were to develop an asset-allocation model, slowly deploy capital, dollar-cost average, rebalance, diversify and invest for the long term.
The pushback from certain quarters was fierce. (Although a lot of readers sent nice e-mails or posted lovely comments about the piece, and I thank you for those.)
Some folks seemed to misread what I had written. Others misunderstood the approach.
So let’s try this again.
Before we wade back into it, let me explain what that column was not: It was not a claim that stocks were cheap; nor was it a suggestion that you must buy stocks now! Indeed, I tried to emphasize that this was not about the next few weeks or even months, but about a timeline measured in decades.
The goal was to engage in a sober discussion as to what readers should be considering if they happened to have missed a once-in-a-generation rally. Toward that end, let’s look at some of the pushback:
●The only way you did not miss the 150 percent move is if you bought at the bottom and sold at the high and invested 100 percent in the stock market.
This is incorrect. To see why, you need to understand three things:
First, you must recognize that you are not a hedge fund, and your goal as an individual investor is not to outperform the benchmark (not that most hedge funds do, but that’s another column entirely). Rather, your goal is to meet some future need, be it buying a house, paying for college or retirement.
Second, if you were in an asset-allocation model, you would have already owned equities and bonds. And third, you would have been incrementally selling equities into the market peak and rotating into fixed-income investments. And you would have been buying equities into the 2009 lows and selling bonds then. That is what rebalancing does.
●The Fed is printing money, and the Dow is heading to 5000!
Thank you for your forecast!
Truth time: How long have you been peddling that Dow 5000 prediction? How many times have you made investments based on that (or other) forecasts? What is your track record? How on earth do you think you know where the market is going to land?
Sorry to have to tell you this, but you just made my point. You missed the Big Kahuna rally by investing based on your own forecasts. This is a terrible approach.
●Count on the fact that you are an outsider and not privy to the insiders’ knowledge or strategy.
Who are the insiders? Billionaire hedge fund manager John Paulson? His funds have gotten mangled over the past few years. Even what is arguably the largest, most successful hedge fund, Ray Dalio’s Bridgewater, is down this year despite a strong market rally.
The so-called insiders have done no better, and in many cases far worse, than you.
●What makes you think you know where the markets are going?
Gee, I thought I made it pretty clear that I have no idea where the markets are going. But investors do not need to know that to invest intelligently. We do understand long-term returns of asset classes and valuation measures, as well as how mean-reversion works. That’s most of the information you need to make an intelligent asset-allocation decision. No market forecasts required!
●I went to all cash on [the day before any recent market sell-off].
The question isn’t whether you got it right on one day. Anyone can randomly do that. The issue for most investors is how much upside they miss waiting to avoid that down day (off 2.5 percent or worse). And then the follow-up question is simply this: Do you have the tools and the discipline to get back in? In recent years, I have spoken with countless people who managed to avoid the 2008-09 crash but could not bring themselves to reverse direction and jump back in after March 2009. It is an incredibly difficult thing to do and requires enormous skill and discipline.
That’s before we discuss the costs and taxes you pay, assuming you can consistently jump in and out of the market with near-perfect timing. (And the odds are very much against you there.)
●What should investors do if they missed the move in gold from $250 an ounce to nearly $1,900 an ounce?
Good question. As mentioned, if you own a commodity index within your asset allocation mix, you will not have missed that move. But there are other factors about gold worth noting. It produces no income, dividend or yield, so valuing it is incredibly difficult. (Gold is off 35 percent since those 2011 highs you mentioned.)
Second, tradable gold is a tiny asset class. GLD, the Gold ETF, is less than a $40 billion asset. Add in the gold miners (GDX) and you get an additional $7.4 billion; factor in the junior miners (GDXJ), and you get another $2 billion. All told, it’s less than $100 billion (not counting gold futures). Gold bullion, on the other hand, has a total value of over $4 trillion.
●Aren’t you advocating a buy-and-hold approach? I thought you were not a fan of that.
No change of heart — the column was about overcoming the risk aversion that led you to miss a huge rally. I wanted to keep it simple and focus on how emotions can blind logic. Beyond the basic simplicity of the asset allocation approach we took was a more complex entrance-and-exit strategy. There are many variations, all of which attempt to generate better returns by missing some of the downside or getting more aggressive during up moves. But I’ll leave that for another day.
The key to investment success is simple: Have a plan. Follow it faithfully. Max out your tax-deferred accounts. Dollar-cost average. Rebalance. Diversify. And invest for the long term.
~~~
Ritholtz is CEO of FusionIQ, a quantitative research firm. He is the author of “Bailout Nation” and runs a finance blog, the Big Picture. Follow him on Twitter @Ritholtz.
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