A long time ago, back when I still lived in the Bay Area and before I met Charr, I had a most unusual housemate at the place where I was living. He was still in school, a couple years younger than I, yet he possessed an unusual amount of clarity, intelligence, and wisdom about life, and when I talked to him, I mostly always got something valuable out of the discussion.
My housemate was someone who thought for himself, and who looked beyond the normal thinking of the world to find and follow his own truth. Although he seemed to have his own spiritual understanding of the world, a lot of his knowledge was very pragmatic. For instance, he suggested that I unplug cords, because that ate up electricity and cost money. He gave me a brochure on life insurance for a company he recommended. He suggested that I cut my own hair, or have someone do it rather than paying for it.
And though I can’t say for sure what he invested in, I know that he invested. Knowing his practical, frugal nature, I wouldn’t be surprised if he invested in index funds. In truth, I was too clueless at the time about investing to know one way or the other. However, when he moved out of the house in order to go teach English in Japan, he left me with this advice:
“Stay the course.”
I believed at the time he was referring to my music career, as I had talked to him extensively about my musical ambitions. I took it that he was encouraging me to pursue my dreams. However, I have since heard this mantra over and over again in investing circles, particularly in the buy-and-hold, long-term investing space that I gravitate to. Now I wonder if perhaps that is where he heard the phrase.
In fact, just today I was looking at the latest edition of “Kiplinger’s Personal Finance” magazine, and I read an article called “How to Stay the Course,” with the sub-heading “The best returns come from time in the market, not timing the market.” In it, the writer noted that back in May–which was a pretty tough month for stocks–a record amount of money was withdrawn from exchange-traded funds (or “ETFs”–these are a popular form of index funds, different from mutual funds though often tracking the same stocks and/or bonds). In fact,
May marked the largest monthly exit from exchange-traded stock funds ever recorded, with investors walking out the door with $19.9 billion.Kiplinger’s, August 2019
The article goes on to describe this as classic market timing behavior: investors wanting to get out while the market is down, in hopes of avoiding dramatic losses. The author then goes on to point out–rightly, I think–that trying to be a crystal ball and predict when the market will be up or down is probably a losing battle, if not impossible, for the average investor. He also points out that while many of the market’s losses occurs on a very small number of bad days, much of the market’s biggest gains also occur on a very small number of really good days.
In other words, while a successful market timer may (and this is a long may) be able to avoid the worst days, they also need to be in the market to gain the benefit of the best days. Getting in and out of the market easily risks losing out on biggest gains.
What is a poor market timer to do? How to know when to get in, and when to get out?
Of course, the answer is: Don’t. Instead, stay the course! As the article goes on to say,
Investors who don’t have a crystal ball are better off staying fully invested than attempting to wring gains from short-term, market-timing moves.Kiplinger’s, August 2019
Upon reading the data of the massive withdrawals from ETFs in May, I admit I was a little shocked. What do those misguided market-timers think they are doing? Don’t they know how unintelligent that is? I of course already subscribe to the notion of “time in the market, not timing the market.”
Although the data doesn’t prove that all this money was withdrawn out of fear of loss, clearly fear of loss can cause investors to make stupid decisions. I was surprised to think that this might have been true back in May. Personally, I hardly remember the market loss. But where it seems investors can get in trouble is that, when they sell out of fear, they risk locking in losses, including missing out on future gains.
I appreciate the reminder that this article gives to maintain a long-term focus, and not get blindsided by momentary concerns.
I also appreciate my former housemate, who seems to have planted seeds in my mind that have been especially useful in my investing career so far–and will be far into the future, I’m sure.