Time in the market is better than timing the market.
The world markets gesticulated wildly last week (Feb 5-9). 1,000 point swings in the Dow and 50 point swings in the S&P were a daily occurrence (sometime multiple swings in one day).
Volatility and uncertainty was rampant and it seemed like every other talking head was sure of either one of two things:
- This is only a minor hiccup in a historic bull market run. Nothing is wrong with the fundamentals.
- This is the start of a market correction of 10-20% from the highs seen early this year (i.e. January 2018).
It seems to me that no one really knows why the markets were swinging wildly. Some point to increased rates (the most likely cause), while other pointed out the inverse VIX ETF collapsing. Some bullish pundits questioned whether the significant drops were an overreaction given the strong economy and corporate earnings seen in the subsequent weeks. Perhaps investors were taking the solid gains received in 2017.
While it’s fun to debate what the cause(s) is, it’s not something I take lightly given the fact that my retirement and my kid’s college savings are partially invested in the markets. As a disclaimer, I should mention that my stock/bond/cash portfolio is very modest given my age. I prefer sleeping well at night than risking mine and my wife’s hard-earned money in the markets.
As a former investment banker and stock market enthusiast, I watch the markets more so than I need to given my modest and simple portfolio. I only hold index funds, and two at that (VTSAX and VBTLX). These are overall stock market and bond market funds with extremely low expenses (Admiral shares, of course) offered from Vanguard (more on my portfolio choices in a later post).
Since I watch the markets relatively closely, I find myself being drawn to the declines, especially the significant declines of 1% or more. As I’m still in the early stages of my wealth-building years, I see those as buying opportunities. I very rarely, if ever, actually buy during the drops, and here’s why:
- As an individual investor, I have no control over the movement of the market, or any individual stock or fund. Those movements are controlled by the very large institutional clients, of which I am obviously not one.
- Regardless of how much I read and listen to the market news, I really have no clue as to whether the stock market is going to go up or down over a very short time frame (week, month). I still read and listen because it’s interesting to me, but I never act on the advice of one, or twenty, pundits/journalists, etc.
- Liquidity – Had I invested at the drops circled in the graph above (what I’d term the ideal buying times), I’d have gained some during the first half of Feb. 7th and subsequently given it all back, and then some, by 4pm on Feb. 8th. Not only would I be tying up my money, I would be expended effort and time which could probably be spent more productively elsewhere in my life.
- I do not chase the market, nor am I a day trader. I am a long-term investor with a firm belief that over a 30-year time horizon, the market will be higher than it is today. How much higher? No one knows. Could be 20%. Could be 5%.
- I have no idea how long a bull or bear market or decline will last. It could be a few days. It could be the start of another recession a la 2008-2009.
This does not mean I sit on the sidelines and wait until it’s a good time to invest.
I DCA (dollar cost average) in each month at a set amount to VTSAX. I get an email from Vanguard confirming the trade at the end of each month. This is on auto-pilot and is an easy and simple way for me to not only invest in the markets, but also save for retirement, college, and other things.
I also automatically invest in VBTLX in my 401k each pay period. Another easy way to save for retirement automatically and invest in the market at the same time.
At the end of the year, I’ll invest more in VTSAX or VBTLX, depending on which way I need to rebalance, if at all.
The one caveat to this is that if there is a correction in the markets of 10% or more, I will deploy some capital to VTSAX. A 10% correction signals to me that something is fundamentally happening and given my long-term horizon, it’s as good a time as ever to buy.
My advice is simple: don’t overreact to upswings or downswings in the market. Your best bet is to STAY THE COURSE. Close the browser, turn the TV off, and get outside for some fresh air. Stop checking the markets every 5 min. This is especially true if you have a long-term investment horizon like I do. You probably won’t remember the majority of these insignificant events in 30 years.
What do you think? Are you ever inclined to buy during a market drop? Do you ever deviate from your overall investing strategy?