Broker Check

Market Timer or Risk Manager

August 05, 2019

Late last year the stock market dropped approximately 20 percent. Through the first 7 months of 2019, it has recovered all of that lost ground. In fact, the S&P 500 made a new all-time high this past April, to retreat quickly, only to make a another new high in July! Though there have been several ups and downs, as of this writing, the market is almost exactly where it was a year ago.

Experience tells me that some number of investors sold significant portions of their equity (stock) holdings during the last downturn. Some percentage of those must have sold at or near the low point, just before the market rebounded. They may have thought something like, “things have been going too well for too long, and this is going to be the crash I’ve been worried about.” We know now that it was not. Hindsight is always clear sight.

The people that took some or all their money out of stocks late last year may have bought back in. Others may still be on the sidelines waiting for the next big crash. Maybe that crash will happen soon and maybe it will not.

If it does happen, the people whose money is on the sidelines will feel good about themselves, because they would accomplish two things. First, they would avoid losing money, at least on paper. Second, from an ego gratification standpoint, they would be “proven” right. They might privately congratulate themselves on their acumen and prescience. If the market does not crash however, and indeed, moves higher from where it is now, they might not feel particularly good.

Whether they realize it or not, these folks are the market timers. They are attempting to get all in and all out at what they perceive as “the right time.” Worse, they believe that this is what they should be attempting to do. The persistence of this belief might lead them to engage in this folly again and again. I call it folly because this type of long-term investment strategy has a stunning record of underperformance.

Fidelity Magellan is arguably the mutual fund that put mutual funds on the map. From 1977-1990 it averaged a staggering 29% average annual return. Fidelity found, however, that the average investor in the Magellan fund over that period of time actually lost money!

How can that be?

Fidelity found that folks often put their money into the fund and when the market pulled back, they would sell, in the hope of limiting their loses. Then the fund would resume its march higher. People are often undone by their all too human emotions, when it comes to investing. Market volatility and the emotions we are all subject to, make for unsuccessful bedfellows.

There is another group of people out there. We can call them risk managers, though many who fall into this category might not think of themselves as such. This group, of which I am a part, adheres to some simple principles.

- We spend what we have left over after we save, instead of saving what is left after we spend.

- We diversify among and within assets classes because we view investing as a long-term wealth engine instead of a short-term gamble.

- We realize that it is not what you make, it is what you keep.

- We are extremely concerned with our rate of savings – the percentage of money which we save out of what we make – and are far less focused on our rate of return in any given year.

We generally do not hear a lot about this risk management group, because there is not a lot to hear. We live well, we look after our loved ones and we work assiduously to avoid becoming trapped by our egos. In my experience, with myself as well as with others, this can be a tough task.

If being a member of this risk management group – a group that could be termed a logic based investment group, establish a well thought out plan. That plan should be predicated on some unifying concepts about investment, like focusing on saving more and creating an appropriate mix of assets to provide for diversification.

Does being a risk management type of investor guarantee that you will not suffer any losses? Not at all. We are all subject to losses. Period. However, being guided by logic and reason will take us further than working off of raw emotion or planning based on our whims.

If you like, consider working with a financial professional you trust to help you construct a logic-based plan. You can do it. Do it.

Scott R. McGimpsey August 5th, 2019

This material was prepared by Scott McGimpsey and does not necessarily represent the views of the presenting party, nor their affiliates. All information is believed to be from reliable sources, however, we make no representation as to its completeness or accuracy. Neither Summit Brokerage Services Inc. nor Scott McGimpsey is engaged in rendering legal, accounting, or other professionally services. If such assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any federal, state, or municipal tax penalty. Moreover, a diversified portfolio does not assure a profit or assure protection against loss in a declining market. UNIFIED PLANNING GROUP is an independent firm with securities offered through Summit Brokerage Services Inc., Member FINRA, SIPC