Because I love a challenge, today’s topic is about one of the most difficult parts of investing. Like wading into the ocean, the worst part is often the very beginning. You take the leap of faith, accept the cold (at least, assuming you are here in the Pacific Northwest), and you trust that things will work out. It might be investing the proceeds from a house sale, a successful business exit, an inheritance, or a windfall from your career. To make the dollars work for you, we invest and take the plunge.
From my perspective, it is also one of the more difficult parts of helping clients. Done properly, our investment decisions are the culmination of weeks of client-specific work built off the foundation of months and, yes, even years of prior effort. Research, comparisons, and commentary is virtually endless when it comes to investments. Meanwhile, we also meet with clients to identify their goals, time horizon, risk tolerance, cash flow needs, tax situation, and estate wishes (to name but a few). We analyze that info, create a financial plan, and essentially splice it with our investment methodologies to arrive at the client’s specific investment strategy.
But even then, once we know how a client should be invested, there remains a difficult question: how do we implement the strategy? Do we invest all at once? Do we hold off until things are better? Do we ease in over time? And if we ease in over time, at what rate? Does the rate change depending on market conditions?
You can imagine why this is a delicate operation. If the economy struggles and the stock market falls 20% right after you invest a significant part of a client’s lifetime wealth…we dig out of a serious hole. On the flip side, if the market roars to life (as it has done lately), we can miss out on serious investment returns. Missing out on even a handful of those fantastic days in a year can seriously limit your returns.
And timing the market, as many of you know, is incredibly difficult. Valuations can run high (or low) for years. A great example of this is what we affectionately call the Dot Com Bubble. Some experts were shouting about excessive stock valuations even in 1998. And depending on the metric used, they weren’t wrong. But those investors who listened and sold would have agonized as they missed out on some of the biggest returns in history. Unless they waited until late 2002 for the very bottom of the market—another incredibly difficult moment to time, and nearly 5 years later—they would likely have been worse off for the attempt. Most investors would have capitulated for Fear of Missing Out, reinvested, and likely have walked right into the trap of selling low and buying high.
So, how do we navigate these treacherous waters?
First, we invest in companies for the long haul. We commit to investing in stock for long periods of time. Second, we design a strategy that is tailored to you and your risk tolerance.
A strategy we often use is to initially invest a significant amount, but also leave a large portion in a money market or similarly liquid investment. Fortunately, money markets are often paying meaningful interest rates in this current environment, which takes the sting out of “missing out” a little. Then we add over time, gradually. But rather than a steady state, we keep a side eye on historical precedent. If markets fall significantly, we accelerate investing. If markets rocket up too quickly, we take our foot off the pedal and slow our rate of investment. A dynamic strategy often beats a rigid strategy.
There are exceptions, of course. Technically speaking, on average the best thing to do is to buy all at once. More time in the market, on average, means more growth. But we also recognize that you don’t live a life of the average. You are a data point of 1, and we often can’t afford to be wrong.
So we settle for being partially wrong. By gradually investing, often 40-70% initially with smaller pieces following, we participate in up markets and limit our downside timing risk. For clients with a single large sum, we often invest in equities slower compared to clients who are actively contributing each month. For the active contributors, they often want volatility, odd as it may seem. If their investments are down for periods of time, their contributions buy more. And if the investment rebounds eventually, they effectively accelerate their wealth.
Spreading out the investment timing means always partially having to apologize. But the key idea here: we don’t have to be completely right to create a successful outcome for clients. But we absolutely cannot be completely wrong. We sometimes have to take a little return off the table in exchange for maximizing clients’ chance of a successful financial life. It isn’t always exciting, it isn’t the latest sexy investment trend…and it usually doesn’t mean hitting the metaphorical home run.
And that is okay. We want to win the baseball game, even if it means not swinging for the fences every pitch.
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