Grandchildren Have Time
Grandparents Need Timing!
Grandparents Need Timing!
We have all been drilled with the mantra of the brokerage industry over recent years. “It’s time, not timing,” we’re told, that makes money in the stock market. In other words, “hold on, it will come back.” And a buy and hold philosophy does appeal in many ways. It’s simple. It’s low cost. It offers tax advantage. It provides the comfort of sticking with the familiar. And lastly, it works over the long haul.
And yet…and yet…
We don’t always have the long haul. The time frame that matters to a retired person dependent on his investments for income is the length of his life. Currently, life expectancy for an age 65 retiree is less than 15 years.
Additionally, it is not how much growth and income an investment might accomplish in a retiree’s remaining years that is critical. It is instead how badly the investments might lose. The retiree wants certainty. He must not end up without income.
Again, it is not how good things could be but how bad things could be that is more important. Fact: There have been spans of time during the last seventy-five years during which a retiree requiring substantial income might have gone broke if most of his wealth lay unmanaged in the stock market.
Consider that in the infamous Crash of `29, which actually lasted much longer than the one year for which it is named, the stock market dropped eighty-nine percent (based on Value Line data). The market did not recover to its previous peak until 1954—twenty-five years later. The interim years were a rough rollercoaster ride indeed.
Ancient history, you say? The stock market cannot fail in modern times? Sadly, that’s already proven to be untrue. From 1966 through 1982, a seventeen year period, the stock market seesawed in dizzying swings and finally ended pretty much where it began. Just as the Crash of `29 and The Great Depression followed the Roaring Twenties, so did the long-term bear market of the late 60’s and 70’s follow the boom time of the 50’s and early 60’s. How deep and how wide and how shark-toothed will be the bear market that follows the Roaring 90’s? No one can know the future but, based on history, the first three years of the New Millennium may be only a hint of things to come.
Continuing for a moment to look back at the 70’s bear market, during that era there were many years of high inflation and consequent loss of purchasing power not reflected in market prices. What investment dollars did remain at the end of the period bought much less than they had before. Inflation has been low in recent years and so there may be a tendency today to discount it as a real issue. But some experts believe that a continuing bear market in the 2000’s may follow a similar pattern to that which ravaged investors from 1966 to 1982. In addition to frequent and extreme market swings, they expect hyperinflation.
Clearly, your financial future may depend on careful timing, on the what and the when of your portfolio. Most people do not know how to make these decisions. In the recent Dalbar’s Quantitative Analysis of Investor Behavior, a study that begins in 1984, the average investor in stocks is documented to have earned 2.57% annually while the S&P 500 index earned 12.22%. How did the average investor end up earning only a small fraction of the potential growth, in fact less than the average inflation rate? He bought and sold at the wrong times.
This Dalbar information may begin to sound like an argument for the “time, not timing” school of thought, but I remind you of the above history lesson: periods of many years, even decades, can be truly disastrous for stock market investment, and especially if one requires regular distributions to maintain lifestyle. The Dalbar study cited covers a period of only nineteen years and largely corresponds in time to the greatest bull market in history. It tells a clear story about how badly investors can do during the best of times. It does not make clear how much worse they can do during bad times.
As I write this in late 2003, the market has risen considerably from its lows over the last three years. If we believe the popular media we accept that the bear market which began in 2000 is over and a new bull market has begun. On the other hand, some very smart, studied and experienced people believe that a long-term bear market trend has only just begun. They believe that the rise of the market from March, 2003 shapes what has been called a “sucker’s rally”. They point out that there have been many similar rallies in past long-term bear markets. They point out that the economic fundamentals for the beginning of a new bull market are not in place, that in fact all the negatives are in place to suggest hard times ahead. They point out that current technical measurements of the stock market itself as they are compared with past measurements and patterns also fail to suggest a reversal of the long-term bear market trend. In short, they say “look out below.”
They may be wrong. Maybe what we hear from the politicians and the media is true: all is fair ahead.
How does one choose investments so as to be okay either way?
The answer begins with tailoring an investment portfolio to personal needs and priorities. With that foundation, that clear orientation, then every aspect of the plan must be made sensitive to the current economic and investment environment and to changes in these external factors. What, you don’t keep up with all that? Then you need the guidance of an expert who does.
When we read our grandchildren a story we want it to have a happy ending. Each of us wants his own story to have a happy ending as well. However, that happy ending may be threatened when a retired person follows the philosophy of “time, not timing”. Yes, grandchildren do have time, and they can afford a made-up ending. But grandparents must face reality. Grandparents need timing.
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