I Didn't "Intend" To Market Time

I Didn't "Intend" To Market Time

                      by: Brendan Magee

I can't think of a word that has gotten more attention then the word "INTENT." F.B.I. Director James Comey brought a lot attention and shook the heads of a lot of people when he decided that charges should not be brought against Hillary Clinton because she didn't INTEND to harm the country with the use of her personal e-mail server during her tenure as Secretary of State.

Most of us have to live in a world where we do not get to split hairs. We have to live with what we did, not what we intended to do. Run a red light and telling the police you didn't intend to run the red light won't get you out of the ticket. Cheat on your wife and telling her you didn't intend to hurt her probably won't get you out of a big fat divorce settlement.

Investing is an area where intent can often overshadow the good or bad that results from our decisions. Market timing is defined as any attempt to alter or change the mix of a portfolio based on a prediction about the future. The definition seems pretty clear. Doing anything based on a prediction is market timing. The problem with market timing is that no one can consistently predict the future. Hence, if you engage in, or allow your adviser to engage in, market timing you are going to more often then not guess wrong and cost yourself money.

The Prudent Investor Rule circa 1990 spells this dilemma out pretty clearly, "Bargain shopping in an attempt to separate the winners from the losers based on a forecast about the future is deemed wasteful. 

What can cloud the issue and get us to engage in wasteful behavior? Instincts and emotions. I recently had a discussion with a colleague who was a proponent of  guaranteed annuities to protect against the drops in the stock market. Now this is not a dishonorable person. He genuinely has the best interests of his clients at heart.

We need to step back and look at what is driving his decision here. He doesn't want to see his client's money suffer a major loss such as 2008. Now all the losses he is fearing have happened in the past, 2008, 2002, etc. The crash he is trying to help  his clients avoid is some point in the future. He doesn't nor does anyone else know when it will occur or how severe it will be. Hence, he is investing money based upon a prediction or forecast about the future. He has unintentionally engaged in market timing.

Now what is wrong with that? There are rules for successful long-term investing that have to be followed at all times, Own stocks or equities, diversify, and buy low/sell high. These are no different then eat right and exercise as far as health is concerned. Following the rules isn't always easy or comforting, but we all know the penalties if we break them.

From January 1, 1996 through December 31st, 2015 there were 5, 040 trading days. If at the beginning of our time period you had invested $10,000 in U.S. Large Company Stocks and stayed invested all the way through, enjoying all the good days and enduring all the bad days, your investment would have grown to about $50,000. If you at some point decided to get out of the market and avoid what you felt are going to be some bad days for just say 20 days and those days were among the best 20 days (only 20 out of 5,040 days) your $50,000 account would only have grown to $20,000. (Investing involves risk and returns are not guaranteed)

The problem is no matter how noble the intention of helping someone avoid losses in the market is, no one  knows with any certainty when the good days will occur or when the bad days will occur. What we are also forgetting here is that avoiding the bad days doesn't even matter in the long run. All that mattered was  maintaining the discipline necessary to follow the rules for successful investing.

So know when you engage in or allow someone else to engage in market timing with your money you are not breaking the law and you will not face a federal investigation. History shows that you will most likely be costing yourself a whole lot of money and all the possibilities that go along with it.

Brendan Magee is the founder and president of Inevitable Wealth Coaching. With questions or comments e-mail brendan@coachgee.com or call 610-446-4322.