Waiting for Godot

Waiting for Godot

Actually, waiting for the market to drop so stocks can be bought. The person I met with is loaded up with cash and he told me he was waiting for the market to “correct,” i.e. to drop, so he could invest at the “right price.” After speaking with him, it appeared that the real reason was that he was afraid of the market, and craved safety. What he was saying did not represent how he felt, and because of this he was losing opportunities. He also had more at risk than he believed he did.

Here is some background
He told me he had 40% of his investible assets in “cash,” 25% in intermediate term bond funds and 35% which was in his 401k accounts were in “balanced funds.” The cash he referred to was half “intermediate” municipal bonds funds and half in money market accounts. He told me he wasn’t afraid of the market and would go all in when it dropped. He was in his early 60s and planned on retiring in 3 to 4 years.

Here are some of my thoughts and discussion points
1) By waiting he was engaging in, or attempting to engage in, market timing. This is a discredited strategy (by Prudent Investment Advisor acts and by FINRA, the securities industry regulatory body). Simply put – it doesn’t work.
2) By saying he was waiting, he was fooling himself. He wasn’t recognizing the reality of how he felt about the market, which was that he was not comfortable with investing in it.
3) While he was waiting, he had half of his 40% cash hoard at risk in a low yielding bond fund that had the promise of dropping when interest rates would grow. To me this represents an undue risk of “safe” funds.
4) The other half of his hoard was in miniscule yielding money market funds. To me, this is a waste in that it does not provide any reasonable yield or meet any real purpose of keeping the funds available.
5) His 25% in bond funds presented a significant risk he really did not understand. The rule of nature is that bond values decrease as market interest rates increase. This money was at risk, and there was no compensation for that risk with the fund’s current yield.
6) The 401k money in balanced funds was a mixture of higher paying dividend stocks and more intermediate term bond funds, both calibrated to drop as interest rates grew.
7) His intention to retire made him feel that he should be heavier in fixed income rather than stocks. I totally disagree with that. His age meant that at least one of him or his wife would live at least another 30 years based on IRS life expectancy tables. I feel not having a meaningful position in the market would be irresponsible on his part since there would be no growth.
8) His counter argument was that he would be in the market as soon as it dropped. My experience is that those that wait, never act because either the market is not low enough, or that when it starts rising they won’t act because of the missed opportunity before it went up and so they wait until it backs off to the previous level. They wait and wait and wait with no action. Meanwhile they are losing yield.
9) If you want to be in the market, be in the market. If you are investing for the long term, the price you pay now is not relevant to the overall situation of being in the market. Also, being in the market does not mean buying a few stocks you got tips on. Rather it means having a widely diversified portfolio that is usually obtained by owning 3 or 4 of the major index funds. Further getting in now starts the flow of dividends. The person I spoke with lost at least 6% of dividends they would have received over the last three years had they gone in the market then.

My advice for his consideration
10) Since we need to recognize that there is a legitimate fear of the market, I suggest keeping an amount equivalent to six months spending in the money market fund for immediate availability and then putting another twelve to eighteen months spending into 15 month CDs. Anything over that should go into the index funds. The 24 months spending amounts should allay any fears about the market and insulate him from needing cash during a market drop.
11) Switch the 401k money to an S&P 500 index fund. This money will be there virtually forever and will provide meaningful cash flow when the required minimum distributions must start.
12) Get out of the bond funds – they are time bombs destined to never return the amount you invested. If you want fixed income consider long term (20 years or more) BBB rated corporates (4 to 4.5%), or fixed annuities about (3% for 10 years) or even 15 month bank CDs paying about 1.25% right now.
13) If you want “balance” do not use the balanced funds. Instead apportion that money between the stock funds and actual bonds.
14) My suggestion for exchange traded funds (ETFs) is DIA, SPY, QQQ and IWM or their equivalent in index funds.

My “advice” here represents suggestions. This person, and you if this applies to you, should meet with a financial or investment advisor and/or financial planner and develop a financial plan and then select the investments that will lead to accomplishing the goals leading toward your financial security.