In the media business, they tell reporters to not bury the lead. So in that spirit, the quick answer to the question can someone time the market to avoid the pain of loss, is yes! However, there is a big caveat. Just like having a financial plan that counts on winning the Power Ball lottery has very low odds, it is a very low probability chance that someone or an organization will find a strategy that can consistently time the market where they get high returns and very low volatility.
At Harford Financial Group, we pride ourselves on being hungry and doing a tremendous amount of research which includes being students of our craft and doing an incredible amount of reading. Personally, I love this profession and totally geek out reading research and books. In my reading, I came across two gentleman and companies who have had high returns and were able to have very low volatility: Ray Dalio of Bridgewater Associates and Jim Simon of Renaissance Technologies.
So you are saying to yourself, “Hey dummy, if you found these guys why don’t you invest your money and more importantly my money with these managers?” I get your drift. The reason is they are hedge fund managers and the minimum investment for their funds is somewhere in the range of $5 billion dollars (Yes, grab your pinky like Doctor Evil and say billion). Typically, they are investing in what is called sovereign funds meaning they are investing for a country. You heard that right a whole country for their government. What Bridgewater and Renaissance are is quantitative companies that use major super computers that mine many data points to make decisions. They guard their technology fiercely and its secrecy.
Therefore, as I said before, it can be done. However, it is sort of like my dream of playing shortstop for the Orioles when I was a kid (that pesky Ripken guy got that dream), of all the kids who play baseball only a small fraction will ever make it to the major leagues or the show.
I hope all of this does not depress you. The reality is that for the vast majority of us, the answer is no when it comes to “Can I time the market to avoid the pain of losses?” First of all, it is normal that you as an investor want to avoid pain. It is human. We as humans feel the pain of loss two to three times harder than the pleasure of gain. Understand this! However, just like achieving anything meaningful in your life, you have to be willing to endure certain amount of pain. If we want muscles, we have to work out and eat our vegetables. If we want our kids to be good citizens, we are going to have to discipline them even if we do not want to for their own good. If we want to get that advancement in our career, we have to make sacrifices.
As we have said before, the best way to accumulate wealth over the long-term is to invest in good companies. Some people do this by starting and running their own businesses. For most of us, it is through stocks of the best run companies not only in the U.S. but the world. Stocks over the long-term beat cash, bonds, real estate, gold, silver, and every asset class.
Additionally, it is important to understand the difference between loss and volatility. Many of you who work with me have heard this before. Warren Buffett has many pithy quotes. One is: “There are two rules to investing. Rule #1: Do not lose money. Rule #2 Don’t Forget Rule #1.” I always struggled with this because Warren Buffett made his billions investing in stock and he does not believe in market timing. I finally figured it out. He does not focus on short-term volatility (for him short-term could be years) instead he focuses on if he invests in a company will it go bankrupt like Sears and K-Mart or lose value over the long-term. We really want our clients to understand that volatility does not equate to loss unless you panic sell.
This is why we fiercely believe in the bucket approach of dividing your money into three buckets of now, soon, and later. Now is for the next year. Soon is 2 to 10 and later is 10 years and beyond. We believe that stock is generally for the later. Money one needs for now and soon generally should be in cash and bonds mostly so that it has limited volatility and one can ride out the corrections and bear markets where the stock market is tremendously down.
Finally, we can tell you from experience how incredibly hard it is to find managers who can limit the downside. After the housing/banking crisis of 2007-09 where from top to bottom the market dropped close to 57%, we looked for managers who could time the markets. We called them tactical. We uncovered a lot of rocks and searched high and low.
What we found is that the markets are too complex and are affected by too many factors. A tactical manager could possibly get out before a big drop and get back in at a low maybe once or twice. But we found that no one could consistently do it under all circumstances. I like to use the analogy of a fire detector. You need a detector that is sensitive enough to detect an actual fire that may burn down your house but won’t start the sprinklers when you are cooking. The tactical manager strategies did not work under every circumstance. For instance, in 2020 when the pandemic hit in March 2020, it was the fastest bull to bear market ever and market dropped over 30%. There was a lot of pessimism on when economy would open back up but Federal Reserve said they would take extreme measures and market came back quicker than expected.
We have spent a lot of time recently communicating to help you as our clients be armed with as much knowledge and education to make the best decisions for yourself. It is always your money. I hope this helps. I really try to be candid. To be a successful long-term investor, we have to understand how incredibly low the probability is to time the market. It is about weather proofing your house before the storm and know that your financial house can withstand and eventually the storm will end.
If you have any questions, please contact me or one of our financial professionals.