Timing the Stock Market…. Yea right !!!!

It’s not a bad problem to have.  A little extra in the bank... on hand for whatever life throws at you. 

What about investing that money?  However, the markets are roaring, surely now would not be a smart time to buy.  Right?

In this episode of Sara Makes Sense, host Sara McCullough breaks down the fear and impossibilities of timing the market. 

And she outlines the most common mistake we make when it comes to our money.

Got a question for Sara?
Send her an email at ask@saramakessense.ca and she might respond to it in an upcoming episode
  Sara's website is https://www.wddevelopment.ca/ 

Transcript

Sara McCullough (00:01):

Yeah. <laugh>, I'm completely not ready. So let's do this thing. 

Sara McCullough (00:14):

You know, you're not supposed to, right. I know that, you know, you're not supposed to, by the look on your face or the tone in your voice, when you ask me, I'm not going to justify that behavior. So I pause and you jump right into that pause. You say, I know, I know I'm not supposed to time the market, but I just thought I could. Yeah. You just thought you could, maybe that maybe I would make you feel better about that pile of cash that, you know, shouldn't be a pile of cash, but it is. So now what? 

Sara McCullough (00:53):

There's a way back into the markets. There's a way to get that money that you've saved to actually do something for you while you're living your life. I can help with that. The first thing I'm going to tell you, after you jumped into that pause is the longer I do this, the longer I advise clients, the more sure I am that humans are not cut out for investing. It gives us none of what we like. It's unpredictable. We take losses, we feel stupid, and we try to invest in hindsight. The market doesn't reward any of that behavior. In this episode, we're going to talk about how to invest when you've either accumulated cash, because you've never made a decision, or you sold your investments when the markets got rocky, or when you got spooked or however you got the cash, your long-term goal is investing. And at this moment you just can't see how to get from here to there. I'm Sara McCullough and this is Sara Makes Sense. 

Sara McCullough (01:57):

Okay. Cash, it's handy. It's comforting. It stays where you put it. There's no surprises. Of course it's comforting. It also at a certain point gets paralyzing. How do you make a decision on such a big amount of money? The tension increases daily. The money's too big to sit there, which means it's also too big to safely invest, how to choose? We're going to talk about a few things in this episode of Sara Makes Sense. All of them are related to how you relate to your cash, temporary cash, I shouldn't have done that cash, now what cash. I'm going to start with an experience I had with a client. We'll call him Arnold. He was sitting on cash for a long time. At first, it wasn't a lot of cash. He's a business owner. The first amount of cash was a surprise. It takes a lot to start a business and he didn't have access cash for a while. 

Sara McCullough (02:56):

Then poof, it worked - profit. Arnold was busy. He meant to make a decision, but busy, poof, more cash. Now the decision was a bit bigger and Arnold's goals are bigger. And time passed. He had a few conversations with investment advisors. He knew he should be invested. He wanted to be invested, but those conversations didn't ever get to the heart of what he wanted for his family, his goals, he couldn't connect the product pitches to his life. So time passed. By the time Arnold arrived in my office, five years had passed, and his bank account was holding $700,000 - in cash. We talked about a number of things and I recommended a few investment advisors. Remember I'm not licensed to manage investments directly now. I advise clients on how their portfolio aligns with their risk tolerance and risk capacity. I advise on how to save money and what the tax implications are. 

Sara McCullough (03:55):

I advise on how to withdraw money from portfolios for both short term and long term goals, but I'm not the investment manager. So, Arnold has a few conversations with investment managers and some go well, but Arnold needs to know how much have I lost by waiting. So I worked out an estimate, roughly speaking over five years, Arnold had missed $40 to $60,000 in returns, after fees. Why the range? I had to ballpark when he would've invested the money, we were looking at two different portfolio options, more on the effect of that in a few minutes. That's a lot of money. And I want you to put that in perspective, $40 to $60,000 over five years on an ending total of $700,000. Remember, Arnold built up that money over five years, he didn't start with $700,000. So yes, that $40 to $60,000 matters. Other factors also matter. 

Sara McCullough (04:53):

There's a few ways that Arnold could have cost himself more than the $40 to $60,000 by sitting in cash. So how does market timing happen when we all know we're not supposed to do it and it doesn't really work. I said earlier that humans aren't cut out for the markets. The psychology of what happens when we see losses in our portfolio, when we read media about what's happening and we extrapolate to how that might affect our investments, when we think about what might happen, which experts sees. Whatever! We all know we're supposed to buy low and sell high. All of my clients can finish that phrase in my office. But when you back up and look at how money moves in and out of the markets, in practice, we do the exact opposite. We sell low and we buy high. Statistically as a group, we sell near the bottom. Why? It stops the pain. Losses are painful. Even losses on paper or these days, on screen. So painful. We feel stupid. We feel angry. Sometimes we actually feel betrayed. So we look for a way out, a way to stop that feeling, a way to control what's happening. Cash. It's predictable. It stays where you put it and you are back in control. 

Sara McCullough (06:20):

And now you've taken a loss. It's not temporary. It's not on paper or on a screen. It's a loss. So you need a plan to go back in. A clear one, one that you will follow. Otherwise you do have a long term problem. I know, I know when you sold, you promised yourself, you would go back in. You're not scared of the market. You just, well, you're gonna go back in. Once things settle down. Great. Now you have to get around the next part of the buy low sell high statement. Statistically, most investors go back in after 70% of the gain in a market cycle has already happened. That's right. You sat and watched, ready to go back in when you felt comfortable, it took 70% of the gain to make you more comfortable. Part of the problem with that is we don't know how much gain there is. 

Sara McCullough (07:22):

The market's not gonna tell you, but statistically 70% of the gain and you're gonna be comfortable going back in. On some level, we all know markets are cyclical. That means ups and downs, but when we're in it, we hate it. We look for a way to control. To stop. We only want the ups - that's normal, but not beneficial. If you've cashed out or are sitting on cash, how do you benefit from this market that regularly gives us what we don't want. Get a plan and get an investment advisor that you communicate well with. There's no other option. You will have days, months, sometimes, years that you may not like your investment statements. You need to understand the long term effects of being in and being out. You need to understand the difference between long term in the market and long term in the human sense. 

Sara McCullough (08:25):

It's like human years and dog years. One year in bad markets can feel like seven years of human misery. If you give in and give up, you will lose and possibly prolong the misery. The only way to benefit from the ups and the downs is to have a consistent plan and stick it out. You need to know what you personally can handle and what you personally need to happen. You need an advisor with technical skills and communication skills. Let's move now to talking about the mechanics of getting in or getting back in. Dollar cost averaging. Maybe you've heard the term, maybe you haven't, maybe you've heard it and can't apply it to your situation. Dollar cost averaging is taking smaller amounts of money and buying the same thing regularly. So say you've decided on a portfolio and investments, and then you put the same amount of money into the same investments regularly. To use round numbers. 

Sara McCullough (09:30):

If you want to invest $12,000 a year, and you're going to dollar cost average that, you can spend a thousand dollars a month and buy the same investments every month. Some months you're buying more units or more shares, some months you're buying less. Remember when markets are low, you're buying on sale. We'll happily buy anything else on sale, except our investments. As I said earlier, when investments go on sale, most of us sell them. Dollar cost averaging does a couple of things. But the biggest thing it does is makes us disciplined. As clients, we set up the amount and the purchases to happen automatically. This gets our human selves out of the way. Over time, we end up with a steadier return than if we were assessing every purchase. Make sense? It does for the majority of us. Some people hate dollar cost averaging. I've had a few memorable conversations with clients who, as it turns out, hate dollar cost averaging. 

Sara McCullough (10:39):

When I was managing investments for clients, one of my clients would deposit his entire RSP contribution in the last two days of the deadline. Why? Because he could. He hated the markets, didn't understand them, and didn't want to. He knew he needed to invest to meet his goals. And he did that. But as he says, I can't control anything else about this whole mess, but I can control when and how I deposit. Fine. Why was that fine? Because that was his version of consistent. Do what works best for you. The longer you're consistent, the better your odds are of making money on your money. Over longer periods and by longer periods, I mean, five to eight years, we lose as clients when we keep switching strategies. Anything can work in the short term and anything can look like it's failed in the short term, do not judge your investments or the market or yourself. In the short term, you need a strategy that feels comfortable to you on its worst day. When you meet with an investment advisor, I recommend that you understand how the existing or the recommended investments will behave on their worst day. No one needs help with investments on their best days. I manage money for clients for 15 years, nobody ever called me up and said, Sara, I just opened my statement and I made more money than I thought, I need to see you right away. 

Sara McCullough (12:15):

So we've covered dollar cost averaging. So can you go all in with a big amount of money? Yes. If that's what works best for you. Again, you need to know the potential outcomes in the next few years. If you can live with the hardest one and you prefer all in, then do it. Does that sound radical? Dollar cost averaging gets most of the coverage. Again, it's discipline that works for lots of us. There is research that shows, all in, even at what seems like the worst time, does work. For example, the great depression. The top of the stock market was in 1929. If you put all of your money, so if we think back to Arnold, if he put his entire $700,000 in the stock market, the day before it crashed, if Arnold stayed in, did not sell his investments, did not mess around with the underlying investments, he would have broken even faster than either dollar cost averaging or waiting. 

Sara McCullough (13:35):

Often as clients, we go to our investment advisor, looking for the right answer. As clients, we think that there's a short list of investments or strategies that we can use and then it will all be good. We win. Investing solved. No. There is a right answer. And the right answer is what drives you the least crazy? What can you live with on its worst day? At any given moment, there might be a thousand ways to make money in the market. And there's going to be about 10,000 ways to lose money. You need to find the way to make money that works for you and avoid the ways to lose money. In the long term. There's lots of investment strategies that work over time and you need to give them time. First, the strategy needs to be in a risk level and liquidity level that suits you personally. And then you need to let it work. 

Sara McCullough (14:40):

For my listeners who've raised children, investment portfolios are a lot like raising children. They're going to have periods where they misbehave. Sometimes they're going to have extended periods where they misbehave. If you didn't give your children away, if you kept trying and you kept them and they came out of it, investment portfolios are like that. You get the right one, you put up with the misbehaving and at the end of the day, there's a benefit. Another big topic that I won't cover in its entirety in this episode, but I do want to mention - fees. Remember Arnold, one of the things holding him back from making a decision about investing was DIY investing, low fee robo portfolio, or full advisor fees. He hated the idea of fees. He would calculate one and a half percent of $700,000 and then he would think, why would I pay that? 

Sara McCullough (15:47):

And then he would calculate the fee on a robo advisor portfolio. In his case, he was looking at about 0.4%. And then he would think, is that better? But now I want a person. So we discussed this a number of times over the months that it took Arnold to make a decision. When I worked out what he had lost by not investing that $40 to $60,000 that I mentioned at the beginning. He also asked me to work out the fees that he would've paid with both a robo advisor portfolio and with an investment advisor. Because we were talking about a specific robo advisor portfolio and investing with a specific advisor, I could do that. So the short answer to this, the robo advisor portfolio, he would have paid less and also had less return. The investment advisor, he would have paid more and the portfolio would've been higher. Overall, about 1% higher over that five year period.

Sara McCullough (16:46):

Arnold needed this information to make his decision. He was clear on where I made assumptions and where the numbers were estimates. And for those listeners who need to know the end of the story, Arnold did finally make a decision. He made the right decision for him. The one that would drive him the least crazy, and the strategy that he could maintain over time in all potential markets. To come to this decision, we talked through more than products, portfolios, returns, and fees. We talked about goals, priorities, day to day realities, and his interests. If you're holding cash, however you came to that place, have a conversation about how to get invested and how to stay invested. Don't get knocked off a long term strategy by short-term volatility, short term doubts, and human reactions to make it stop. If cash really is where you're most comfortable and where you want to be, get clear on that plan too. 

Sara McCullough (17:51):

Stop wasting energy on investments that you don't want and maybe you don't need. I've worked with clients whose long term plan involved a whole pile of cash. And it worked - for them. There's no risk free investment. There's no risk free decision. Know your risks, know your situation, and make decisions. From time to time, we all need someone who can cut through the noise and investment markets make a lot of noise. Someone who gets to know you, not only as a person, but also can really show and make sense of your financial plan. Not just the numbers, but truly what the numbers mean for you. This relationship and this plan belong to you, not your planner. I'm Sara McCullough. Thank you for listening to Sara Makes Sense. 

Disclaimer (18:44):

The information in this podcast is intended for general information and illustrative purposes. For advice relevant to your specific situation, meet with a qualified financial planner, lawyer, or accountant before making any changes to your situation. Sara's designations and licensing include Certified Financial Planner, Registered Financial Planner, Certified Divorce Financial Analyst, and holding an insurance license.