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If the market is going to get worse before it gets better, shouldn’t I sell now?

Selling when the markets are down may reduce your immediate worries, but how likely are you to know when to get back in? Not likely, says Kevin Grogan. Listen as he explains why market timing is a loser’s game.

Transcript

Tim Maurer:
Hello and thank you for tuning in to Ask Buckingham, an ongoing video podcast series where we invite thought leaders across many disciplines in wealth management to respond to the questions on your mind. My name is Tim Maurer and I have the privilege of hosting these short Q and A discussions as the Director of Advisor Development for Buckingham Wealth Partners, and I also want you to know that I’m a Wealth Advisor with more than 20 years of experience and a client of the firm. The volume of information coming at us these days is so vast and the pace at which that information arrives is so fast that it’s a struggle to keep up with what you need to know to make the best decisions for you and your family. Our hope, therefore, is that this ongoing conversation will become a source of clarity in the midst of confusion and chaos and provide insight that helps you better understand what’s going on in the world financially and otherwise.

Tim Maurer:
Today, we’ll be hearing again from Kevin Grogan, Buckingham’s Managing Director of Investment Strategy, and here’s the question we’ll be tackling. Kevin, it looks like the news is going to get worse before it gets better, so why shouldn’t we just sell now and wait for the market to show signs of strength again before buying back in?

Kevin Grogan:
So strategy, like you just described, is what we would call market time, we’re trying to identify when to get in or out of the market. And really the difficulty that we see with market timing, and this is backed up by a lot of the academic evidence, that you have to be right twice when you try to time the market, both when to get out of the market and when to get back in. So you can use this as an example or think back to the financial crisis as an example, but let’s say you knew with perfect foresight that, say, June of 2007 was the perfect time to sell out of stocks because you knew that a housing crisis was coming. Let’s say you timed that exactly right.

Tim Maurer:
Okay.

Kevin Grogan:
You would also then have to be right about when to get back in the market because even though the market crash from June of ’07 all the way up through March of 2009, the calendar year 2009 was a fantastic year for the stock market, and so the question is what do you have been able to predict that the end of March was the absolute optimal time to get back in? And I know relatively few people, I don’t know any people, who’d be able to get both timing decisions exactly correct. So again, let’s use the current situation as an example, let’s say you knew with certainty, 100% certainty, that the news was going to get worse from here, and again, I don’t know that with 100% certainty, but let’s say you could predict that the news would get worse from here and that now is the time to get out of the stock market, you would still have to know on the second time around when to get back into the stock market.

Kevin Grogan:
And it never feels safe getting back in after you’ve gotten out and so that’s really the big key message I would share with investors, is that you don’t know when it’s going to be safe to get back in. You have to be right twice if you want to win with the market timing strategy.

Tim Maurer:
Well, Kevin, but you can’t tell me, you’re an actual investment pro, you’re sitting behind the computer looking at this stuff, collaborating with a bunch of other investment brainiacs, have you ever been tempted to try and just hit the sell button and wait on it yourself?

Kevin Grogan:
I have not and I’d say a couple of reasons. Number one, I don’t claim to have expert level knowledge about the path this virus is going to take. I’m following experts as best I can like everyone else, and that’s also what the market is doing. And so that’s the first thing I’d share, is that the art industry reacting to this news instantly just like I am as an individual. It’s like a thing I’d share, in my own personal circumstance, is that I have a very long time horizon. So I know that the market is going to pull back, not just this period of time but many times over my investment horizon, but I also take comfort in knowing that over the longterm stocks have outperformed cash, they’ve outperformed safe fixed income, so I would expect that to continue over my relatively long investment horizon.

Tim Maurer:
All right, well, so not everybody has a long investment horizon, so knowing that the news could get worse before it gets better but that we can’t optimally time both the sell and the rebuy, how can the average investor apply this knowledge today, Kevin? Just sit there with a white knuckle grip and hope for the best?

Kevin Grogan:
No, that would not be the advice in this circumstance. The main piece of advice I’d have is building out a well thought out asset allocation first. So I mention that I have a relatively long time horizon, but I’d say with any assets you need here over the short term, say over the next three years certainly, maybe as long as five years, those dollars should not be invested in stocks. Those should be invested in safe fixed income securities so you can fund the withdrawals that you’d need to fund your lifestyle. So that’s a huge part of what we do at Buckingham, is building out safe fixed income portfolios that can help fund a client’s lifestyle so that they’re not having to sell equities during a time period when they are pulling back as violently as they have here over the past few weeks. And then over and above that, it’s building out an asset allocation that matches your risk tolerance that you could stick with the strategy during periods like this.

Tim Maurer:
Sure. Well, Kevin Grogan, thank you very much and thank you for tuning into this episode of Ask Buckingham. If you have a question that you’d like to see us address, you can do so by navigating to the website askbuckingham.com, or you can email your question to question@askbuckingham.com, or you can just click the screen right here and it’ll immediately take you to the website where you can give us your question. Remember, there are dumb questions, but unfortunately there are plenty of poor answers out there. Our hope is that in giving you straight answers to your questions, you’ll be able to apply that knowledge in pursuit of good decision making. So please follow us and by all means, Ask Buckingham.

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