When meeting with potential clients about their accounts one of the main frustrations they communicate is during down markets their previous advisor would state something to the effect of “trust me, we need to hold our positions. now is not the time to sell.” Generically I can’t argue with the advice but giving that advice without context leaves a lot to be desired, isn’t reassuring and can be counterproductive.
So, what is the best way to handle a week like we are having this week where the S & P 500 has closed down over 3% a couple of days. Quite simply, Take the Long View and focus on the things you can control, which are your savings rate and how you react to market events.
In 2014 Ben Carlson wrote a piece that has proven to be evergreen. He introduces us to an investor who he calls the worst market timer named Bob.
Here are a couple of key points of this story:
1. Bob was a diligent saver who started working at 22.
• His commitment was to save 2k/year through the 70s, 4k/year through the 80s, 6k/year through the 90s, then 8k/year until retirement.
2. Here are the rest of the details of the story from Ben
“He started out by saving the $2,000 a year in his bank account until he had $6,000 to invest by the end of 1972.
The market dropped nearly 50% in 1973-74 so Bob basically put his money in at the peak of the market right before a crash.
Yet he did have one saving grace. Once he was in the market, he never sold his fund shares. He held on for dear life because he was too nervous about being wrong on both his sell decisions too.
Remember this decision because it’s a big one.
Bob didn’t feel comfortable about investing again until August of 1987 after another huge bull market. After 15 years of saving he had $46,000 to put to work. Again he put it in an S&P 500 index fund and again he invested at a market peak just before a crash.
This time the market lost more than 30% in short order right after Bob bought his index shares.
Timing wasn’t on Bob’s side so he continued to keep his money invested as he did before.
After the 1987 crash, Bob didn’t feel right about putting his future savings back into stocks until the tech bubble really ramped up at the end of 1999. He had another $68,000 of savings to put to work. This time his purchase at the end of December in 1999 was just before a 50%+ downturn that lasted until 2002.
This buy decision left Bob with some more scars but he decided to make one more big purchase with his savings before he retired.
The final investment was made in October of 2007 when he invested $64,000 which he had been saving since 2000. He rounded out his string of horrific market timing calls by buying right before another 50%+ crash from the credit blow-up.”
3. Over Bob’s investing Career he invested $184,000 and allocated it completely in a S&P 500 Index Fund. This is not a recommendation to only invest in the S&P index fund but simply an illustration.
So, what can we learn from Bob. As stated above Bob was a diligent saver and perhaps more important than when he bought his shares is that he kept disciplined during volatile markets and didn’t sell and kept saving.
I am a visual person, so I enjoyed Nick Maggiuli’s chart from Ritholtz Wealth Management that shows Bob’s progression.
So, to recap, buy and hold for most investors is the appropriate strategy. During weeks like this the strategy and the discipline necessary are tested.
Have a great weekend and TAKE THE LONG VIEW!
If you have any questions or are concerned by the events of this week or any week do not hesitate to reach out.
Investing involves risk, even the potential loss of capital.