Help Me Retire Podcast - Episode 10
- Mike Brown
- Nov 14, 2024
- 10 min read
Timing the market
Show notes:
This is the Help Me Retire Podcast… with your host… Mike Brown… Senior Wealth Advisor with Raymond James Financial Services… and head of Brown Family Wealth Advisors…
Mike is the best-selling author of Your Way to True Wealth: How to Make It Happen, Make It Last, and Make It Matter…
He and his team have been helping clients pursue their dreams of financial independence for the past 30 years… and in the Help Me Retire Podcast… he’ll share his best ideas with you…
And now… here’s Mike…
Here’s a word you don’t hear every day... chrysopoeia...
It dates back centuries... to the ancient Greeks...
And I won’t even try to spell it for you...
But in a second... I’ll tell you what it means... and how it relates to investing your money...
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Okay... so where were we? Right... chrysopoeia... this ancient Greek word...
...that describes a theory... dating back to the third century A-D... that it’s possible to turn lead... into gold...
It was all the rage back then...
In fact... people known as alchemists... tried for hundreds of years to make it work...
They just knew that with the right process... the right formula... it would be possible to magically turn ordinary lead... into glistening gold... and make a fortune in the process...
But alas... it never happened... nobody ever figured it out...
The investment world has its own version of chrysopoeia...
Its proponents are no longer called alchemists, though...
Today... they’re known as “market-timers”...
Ever since the first share of stock traded hands in Amsterdam way back in 1531... market-timers have been searching for a way to game the system...
With the right information... the right formula... they know there just has to be a way to sell stocks as they were starting to go down...
And then buy them back once they started to recover...
No more bear markets... no more holding on to losing investments watching them go down every day... feeling helpless...
In theory... it all seems pretty simple...
If it’s going up... buy it...
And when it goes down... sell it...
I mean... you have to think, in today’s world...
With all these MBAs... and PhDs... and all this data... and all this incredible computing power...
Heck... now we’ve even got... artificial intelligence working for us... as if the real kind wasn’t good enough...
Somebody... somewhere... ought to be able to figure out how to successfully time the market...
Yet, try as they might... and trust me... lots of investors are still trying to discover financial chrysopoeia...
But no one has discovered the secret...
Wait, you say... nobody’s successfully timing the market?
What about all these articles on the internet... saying buy now... before you miss out on the big stock market rally...
Or sell before the election... so-and-so might win... and the market’s going to crash...
Do you know... some people think politics is so important that they’re making huge market gambles with their investments right now based on who they think the next president might be?
They actually did a study recently... at the Schwab Center for Financial Research... listen to this...and keep in mind, all of these examples are hypothetical, past performance doesn’t guarantee success and your returns will vary, but…
With a 10-thousand dollar initial investment... beginning in 1961...
What would your return be for the next 62-years... if you only owned stocks when a Republican was in the White House... and held cash when a Democrat was president?
Your 10-thousand would be worth more than 10-times as much today... 102-thousand dollars...
But if you invested that same 10-thousand dollars only when a Democrat was in the White House...
It would have grown to 500-thousand dollars by now, according to Schwab... 50-times your initial investment...
Aha, you say... there it is... this proves it: You can time the market... based on presidential elections... and you’re better off under Democratic presidents...
Under Republicans... 10-thousand dollars became 102-thousand...
Under Democrats... 10-thousand became... 500-thousand...
And if you just kept your 10-thousand dollars invested the whole time... regardless of who was running the country...
Your 10-thousand dollar investment would have turned into...
5-point-1 million dollars...
I’ve said it before... the U-S equity markets... these hundreds of growing, innovative companies... seem to do just fine regardless of who the president is...
Vote for who you think will do a better job... but if you want good investment returns over time... if you want the opportunity for history to repeat itself...
Then keep politics out of your portfolio...
And for heaven’s sake... don’t waste time trying to jump into and out of the market... based on whatever indicator you choose to look at...
Stocks will do what stocks do... which is to drive us crazy day-to-day... and make us very happy... historically... when we give them enough time...
Just for the sake of another illustration, though... if you’re still not convinced...
Let’s assume it’s 30-years ago...
And you’ve got 10-thousand dollars to invest that year... and every year... for the next 30-years...
And let’s say you’re able... somehow... to invest that 10-thousand dollars on the very day that stocks are at their low... and you’re able to do that every year... for each of the next 30-years...
I mean... you’re buying stocks at the perfect time... every year... the epitome of successful market timing...
How would you have done?
10-thousand per year... for 30-years... that means you invested a total of 300-thousand dollars...
With perfect market-timing... your 300-thousand became more than 1-point-3 million dollars...
With a compound annual return of about 8-point-8 percent per year...
Compare your winning portfolio with another hypothetical investor who just couldn’t do anything right...
He also invested 10-thousand dollars each year... but on the worst possible day...
The day stock prices were at their highest each year...
And he didn’t do a bad job at timing the market once... he bought at the high price every year... for 30 straight years...
How did things turn out for this poor soul?
He invested the same 300-thousand dollars... over the same 30-year period ending in 2023...
But while the perfect market-timer ended up with 1-point-3 million dollars... the worst market-timer of all time...
Wound up with a little more than one-million dollars...
And instead of annual returns of 8.8%... the unlucky market-timer only earned about 7.4% per year...
Yeah... that’s the difference... less than one-and-a-half percent per year... separating the market-timer who couldn’t do anything wrong... and the market-timer who couldn’t do anything right...
And here’s the other half of the equation...
If you’re going to try timing the market... you not only have to know when to BUY stocks... you have to know when to get out of them...
You’ve got to make two brilliant... or let’s call it lucky... decisions every time...
And keep being brilliant or lucky time after time... year after year... knowing that one single misstep... can wipe out all of the advantages of your luck and brilliance...
If you’re still tempted to try market-timing... even knowing now that the upside is typically marginal... and the downside can be catastrophic...
I’ll ask you this question: Who do you know... who have you heard of... who’s ever done is successfully and consistently?
I’ve managed investments every day for more than 30-years... and I’ve never met a successful market-timer...
Legendary investor Peter Lynch once put it this way:
“I can’t recall ever once having seen the name of a market timer on Forbes’ annual list of the richest people in the world. If it were truly possible to predict corrections, you’d think somebody would have made billions by doing it.”
Yet even though no one has ever successfully done it... and even though the risks far outweigh the rewards...
Every day... thousands... maybe millions of investors... large and small... keep looking for the philosopher’s stone...
They keep trying to find the magic formula... the secret to buying low and selling high...
They keep trying to make gold... out of lead...
And here’s the great irony...
They keep trying to game the system...
The same system where the odds are already stacked heavily in their favor... based on historical returns...
I believe there’s only one possible way to consistently earn those historical returns... and that’s simply to buy stocks and hold onto them...
Through good times and bad...
Through bull markets and bear markets...
Through Republicans and Democrats...
If you can’t do that... here’s what will happen...
If you’re trying to build wealth by investing in stocks...
Most of your results are going to come from years and years of compounding...
Adding money to your portfolio with every paycheck...
Earning dividends... and using those dividends to buy more shares...
Remember what Ben Franklin said: “Money makes money, and the money that money makes... makes money.”
That’s compounding... and the trick to compounding is never to interrupt it unnecessarily...
Money can’t compound when it’s setting on the sidelines...
And what happens when you’re not compounding wealth anymore?
What happens when you retire... and you’re trying to live off your investment income?
Well, if you’re timing the market... and you jump out of stocks trying to avoid the next downturn... even if you’re right... you’re giving up that investment income while you sit on the sidelines waiting to jump back in...
The dividends you could have been earning... and spending... won’t get paid to you at all if you don’t own the stocks that pay those dividends...
Why would anyone ever want to interrupt compounding if you’re trying to build wealth?
And why would any retiree ever turn off a reliable stream of income that’s helping them pay their bills?
As I said a moment ago... the simplest way to get the return of stocks... is to buy stocks and hold them through good times and bad...
That’s where that old saying came from... success comes not from timing the market... but time in the market...
But notice I did say buy-and-hold was the simplest approach... I did not say easiest...
It sounds easy just to buy and hold... until those bad times come along...
When stock prices get really volatile... and the headlines get really scary...
It’s not easy to do even what history tells you is the right thing to do... when everybody else seems to be doing the opposite...
How do you hold on then?
How do you lessen the risk of owning stocks... and all the volatility that comes with owning them?
Well, first... you realize that the real risk of owning stocks... is selling them when they’re down...
That’s what turns a temporary downturn... into permanent losses...
To reduce the chance of that happening... never put yourself in the position of having to sell stocks to pay your bills...
We tell our clients...
Any money you plan to withdraw from your investments over the next 5 to 10 years shouldn’t be in stocks to begin with...
Stocks are no place to put the rent money...
Keep that 5 to 10 years worth of planned withdrawals in reserve...
Maybe in bonds that mature over the next 5 to 10 years...
And keep enough in cash to cover your withdrawal needs for the next 12 months...
That way you can let stocks do what they do...
Which historically has been delivering long-term returns far above what bonds and cash have earned...
Even though stocks might drive you nuts over the short run...
Before we wrap this up... I’ve got a confession to make...
There’s a part of me that wonders if one day... somebody might actually come up with that magic formula...
A way to get better returns... and lower risk... by knowing exactly when to buy and sell stocks...
But I know one thing for sure: I’m not going to waste my time... and your money... trying to discover the secret... because I don’t really think it exists...
And think about this: If they ever do discover the magic formula...
It won’t be very long until everybody knows about it...
And once everybody starts investing that way... the magic formula will STOP working...
And we’ll all be right back where we started...
So why are we even still talking about this?
Until somebody is able to turn lead into gold... I’m going to operate under the assumption that it can’t be done...
And until I meet someone who’s been able to time the market successfully... and consistently... not someone who just got lucky a time or two... I’m going to assume that it’s not possible to time the market...
In the meantime... I’m going to stick with what I know works... and keep avoiding things that don’t...
My clients and I are going to own stocks...
We’re going to hold onto them through good times and bad...
And something tells me in the long run... we’re all going to be just fine...
Thanks very much for tuning in to this episode... of the Help Me Retire podcast... I hope it’s given you some things to think about...
We’ll talk again soon...
Securities offered through Raymond James Financial Services, Inc., member FINRA/SIPC.
Investment advisory services are offered through Raymond James Financial Services Advisors, Inc. Brown Family Wealth Advisors is not a registered broker/dealer and is independent of Raymond James Financial Services.
Any opinions are those of Mike Brown and Brown Family Wealth Advisors and not necessarily those of Raymond James. This material is being provided for informational purposes only and is not a recommendation. There is no guarantee that these statements or opinions will prove to be correct. Investing involves risk, and you may incur a profit or a loss regardless of the strategy selected. Prior to making an investment decision, please consult with your financial advisor about your individual situation.
