How Much Have the Peddlers of ''Snake Oil'' Really Cost You? A Painful Life Lesson About the Perils of ''Market Timing'' (2-15-2013)
Remember 2008-09? Those scary times forced millions of investors to get out of the stock market and hold cash or “safer” investments. Were you one of them?
As painful as those times were, how much more painful has it been for those who cashed out for “safety?” That oh-so very seductive “market timing”. (For the unschooled, market timing is any attempt to change your investment mix based on some forecast about future stock market prices and its highs or lows). Market timing is perhaps the most destructive and costliest of all investment mistakes. And, there are an endless number of so-called investment gurus who will tell you they know when to get in and out of the market.
Truth is they can’t!
They would not need your money if they were capable of timing the markets successfully. Instead they seduce you. They don’t make their living by investing in the market. They actually make their living by selling you their “snake oil” (e.g., publications and subscriptions) or earning commissions off investors who do the actual buying and selling.
To be a successful investor requires only four things:
1. Diversify your portfolio,
2. Minimize your costs,
3. Maintain a five year or longer time horizon,
4. Be disciplined.
Discipline is the most important of the four requirements.
The market crash of 2008 presented a huge opportunity for investors who were disciplined. Those who failed to remain disciplined have paid a significant price. How much of a price? Well, the following example compares two investors: the Undisciplined Investor and the Disciplined Investor.
Both began 2008 with $500,000 and invested $20,000 every year. Because of the 2008 market crash, the Undisciplined Investor got out of the market and opted for the safety of cash. All future investments went into cash.
In contrast, although it was emotionally uncomfortable, the Disciplined Investor stayed in the market and continued investing in the market.
Here is a chart of the portfolio values as of the end of 2012.*
The Undisciplined Investor lost 38.5% in ‘08 and earned 0% from ‘09-‘12. The Disciplined Investor earned returns of -38.5% (‘08), +23.5% (‘09), +12.8% (‘10), 0% (’11) and 13.4% (’12).
This difference between being disciplined and undisciplined: $200,000! No matter how you slice it, the Disciplined Investor had nearly 50% more after five years. That’s a painful lesson.
Does this make it obvious that investing is mostly about being disciplined and avoiding the costly mistakes? The really sad part is that millions of investors who got out of the market have yet to get back in because of fear—specifically the fear of loss.
This is exactly what happens when investors let their emotions (e.g., fear and greed) drive their investment decisions. In this case, market timing may mean 2-3 years or more of work before retirement or a scaled down lifestyle.
Sometimes life’s greatest lessons can be very, very expensive. So, how much did that “snake oil” (“market timing”), really cost you?
When you’re ready to make a change, contact us
and we will teach you exactly how to maintain your discipline!
This modified example was based on the example from Dan Wheeler’s Blog “Experience is the Best Teacher”. (http://wheelerwrites.com/)