Why Stealing is Stupid
September 28, 2022 | BY admin
Investing has been tough this year. We have seesawed up and down, with the downs swinging much more heavily. Long-lasting inflation pressures have caught the Federal Reserve flat-footed and are now forcing them to take drastic measures to try to dampen inflation. These measures have caused a lot of turmoil in the economy and have created a lot of volatility in the investing sphere. Equity markets, bonds and REITs have all been struggling.
One core question our clients challenge us with is why we don’t try to sell out before, or at the beginning of, market corrections, and then reinvest once calmer times have returned. This is much easier said than done. In the long run, investing on a constant basis and riding the ups and downs is the winning method. However, when you try to trade around market conditions, you need to be right twice: on the way out and on the way back in. What happens if you exit and the market creeps up another 10%? Will you get back in at the higher levels or wait on the side lines for safety for weeks, months or even years?
Having said that, there may be certain changes around the edges that can be appropriate based on economic conditions. But the slicing and dicing of trading in and out of the market can be a huge drag on long-term performance.
In Morgan Housel’s book, The Psychology of Money, Housel provides a great analogy for bearing the psychological pain to achieve higher returns:
Say you want a new car that costs $30,000. You have a few options:
- Pay $30,000 for a new car.
- Opt for a cheaper, used car instead.
- Steal one.
Generally, 99% of people would avoid the third option because the consequence of stealing a car outweighs the upside. This is obvious, but say you want to earn a 10% annual return on your investments. Just like the shiny new car, there’s going to be a price to pay. In this case, the usual price is volatility and uncertainty. And just like in the car scenario, here too you have a few options:
- You can pay it, and accept the volatility while you hold on tight to your investments.
- You can find a more predictable asset and accept a lower return, such as government treasuries or CDs (the equivalent of the used car option).
- You can ‘steal’ it – a.k.a. trying to simultaneously earn the return while avoiding the price that comes with it (volatility). People try anything to attempt this: trading, rotations, hedges, arbitrages, leverage – you name it.
Unlike the vehicle, with investments, many people attempt the third option. And while a few may get away with it, like car thieves – most get caught.
Running off with investment returns without paying for them – like driving off with someone else’s car – looks enticing (especially if you know that one guy who claims to have done it successfully). But don’t be fooled. The risk is great.
This warning may not be one you want to hear (especially with all the other warnings about economic storms coming our way) but your future self will be thankful. Investments made during bear markets yield amazing benefits down the line. Just make sure you have a sound financial plan in place, and abide by that plan through thick and thin.
(And if you aren’t sure if your financial plan is sound, you know where to find us.)
This material has been prepared for informational purposes only, and is not intended to provide, nor should it be relied upon for, legal or tax advice. If you have any specific legal or tax questions regarding this content or related issues, please consult with your professional legal or tax advisor.