So, about three days ago a couple of my newer clients whom I love dearly started in my ear about the coming market drop. A couple of their trader friends just moved into all-cash, just waiting for the titillating 2012 rally to come “crashing down.”
“Europe is still a mess…”
“We’re probably going to bomb Iran…”
“Oil is going to crush any momentum we’ve got going…”
Insert front of mind headline or concern, add copious amounts of hyperbole and absolute certainty, mix with feelings of doom… you get the point.
So, then I asked what specifically concerned them now more than it did in December. To *Crickets*.
“Well, nothing specific…”
And, so now I know, this is strictly an emotional decision. They’ve had some success this year. Their portfolios are going up more than they thought, but less than they want — and now they are worried the next card laid on the world’s table will be the one that takes them out of the game. I understand. The world is a mess. China. Dying Bees. I get it.
Three down days later… if the market’s course doesn’t change, I’m pretty sure next week’s conversation will include one of them saying “Why Didn’t You Sell?”
And here’s why in three simple reasons:
1) Taxes: Here’s the thing — Those friends who sold the stuff they bought in December (who are pretty well off by the way) just cut their gains almost in half by selling. Paid to Uncle Sam as earned income. I say this because I know rich people love to hang out together & tell each other how great they’re doing — these clients are in the 33%+ tax bracket. Now add-in living in California or New York (because why would you live anywhere else?) How great is that 7% return now?
So… even if the market does pullback, did it do more damage than selling and paying the higher short term capital gains rate? I guess we’ll see. But it’s always something to consider; more than most do.
2) You’re On A Boat… And hopefully someday it will be a very big boat. When I meet a potential client for the first time, some think I’m a financial genie that will somehow solve all their financial ills. I’m not. I won’t.
I’m a guru in the original sense of the word. Guru in sanskrit means one who is regarded as having great knowledge, wisdom, and authority in a certain area, and who uses it to guide others (teacher). I can’t really dispense much in the way of specifics until I know specifically about you. But as your OG sanskrit guru, here’s what I will tell you:
The richest people I’ve ever met don’t own a ton of mutual funds. They don’t have a bunch of private money managers or hedge funds. And their portfolios are all basically the same. —
They never (or rarely) bought anything they didn’t understand to begin with, and they rarely sold anything. That’s not to say they never wish they hadn’t sold things (like GE at 50), but for the most part they bought really big blue chip companies set the account to dividend reinvest and kept adding money to the account when they could.
Or they bought smaller companies using the Peter Lynch model (buying stuff they know)… Like one client of mine who owns Amgen at 67 cents a share — he thought, “these are really smart people trying to kill diseases with biotechnology”
“…That might make some money someday.”
He didn’t bet the farm. He didn’t sell because utilities were rallying and biotech was underperforming… he invested what he thought was a quality company (he did some due diligence), and he invested what he could afford to lose, $10k. Each time things looked tough in the world he remembered why he invested in them: they are going to try to kill diseases with biotechnology; and he still liked that idea. And now it’s worth $1.3 million.
I’ve got another client who loves to go four-wheeling in his Polaris Razor. I went with him (while I had a hellacious cough, btw), and I saw a ton of people using them. So, we looked at Polaris as an investment and we bought some for my client — not because we think it’s going up 40% this yea and everyone should own it. Or worried it will be down 50%. If you invest in any stock, you need to be prepared for a drop of that magnitude –always. No, he/we bought it because he loves the product, thinks this is just the beginning, Could he be wrong? Yep. But he invested the size he was comfortable with and now he’ll watch it (and gladly because he loves the product). If it drops and nothing changes about the reason he bought it, maybe he’ll buy more.
And in the last 8 years or so, I’ve been seeing many more of the wealthy finally started to buy index funds usually to fill in the gaps around their existing portfolios.
Less Can Be More
Now I may be on the “less is more” soapbox right now, but that’s not to say I’m a buy & hold zealot. I’m not.
I think for some of your money you should be ready to go to cash, accepting that you could be wrong. I personally would just rather be wrong with cash in my pocket. And most
rich people feel the same way.
But they have also kept things in perspective. The world is probably not going to end, and if it is– probably no amount of cash (or gold) is going to fix things.
They weren’t selling absolutely everything in their portfolio just because the market was dropping. And they’ve always felt this way about raising cash. They reviewed what they own, and in many cases stayed the course for most of their core holdings… even before they had boatloads of money.
Even when they had a just a little rowboat full of money they didn’t pull in the oars for every grey cloud in the sky. They also didn’t just ride around in the middle of the ocean without some sense of the shoreline. Not even in a yacht.
3) And the third reason I didn’t sell is because my Model didn’t tell me to.
For better of worse, I use a model to manage risk in some portfolios. When it says sell, I have a choice… and conversely when it says buy… I have a choice — but the model is consistent. It uses the same stimuli to make its decision. It’s not emotional. It’s also not perfect. It does what it does & I accept and understand the limitations before I invested a single dollar.
Now, I could change it — I could tweak it. But I don’t. Because that would be dumb. You don’t change your shoe laces in the middle of the race.
Now could I try something different? Sure, but that’s a different decision. And probably at a different time, rather than “OMG the market is dropping/going up” — I should buy or sell. And as it is right now, my model isn’t flagging anything for me to do. And it could be wrong, but I know what my lose potential is from here and I’m willing to accept it.
Here’s the thing — markets correct every 5 years, on average, about 10%. Sometimes markets can suck for years at a time (like I need to remind you). But if you want to invest like the big boats in the water, you’d better be prepared to strap in & right out some waves, and be smart about how much risk you’re taking at any given time. Understand what you own and why. If you don’t, you should.
That’s just the way it is.