| Lummer's Logic |
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| The Weakest Link
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By Scott Lummer
Chief Investment Officer, mPower |
May 1, 2001
No, I'm not going to rail on about the cultural wasteland
of reality television — though I am wondering, has anyone else has noticed that the
weakest link of "The Weakest Link" is the emcee? Actually I'm just jealous
— before that show hit the airwaves I had thought the only suitable profession for
arrogant, rude, know-it-alls was Chief Investment Officer.
The true purpose of this article is to rail on about the
weakest part of most investors' investing habits. Most questions I have received over the
past few weeks have started with these four seemingly innocent words: "Is now the
time ...?"
As in "Is now the time to invest more in stocks,
before the market starts to rebound, or should I wait?"
Or, "I have my money in four risky small company
funds. Is now the time to diversify, or should I wait until my funds recover?"
I understand the motivation behind these questions because
I know there is a perception that investment advisors are soothsayers who know what
direction the markets will be going over the next few weeks. The sad truth is that we are
not. Although many respected investment professionals may have a feeling about which
direction stock prices will move, they would never suggest to their clients that they
should alter their long-term investment strategy based on that hunch. Yes, there are
charlatans who claim they have the power to predict market movements, but they flame out
after a few silly conjectures go wrong.
The Time is Not Now
So, the simple answer to the above questions is no, now
is not the time. There are two correct times to follow a particular strategy, always or
never. A less catty (and less obtuse) way to put it is that anything that makes sense to
do over the long term makes sense to do today, and vice-versa. Your mom was right —
never put off until tomorrow what you can do today. If investing in equities is right for
you in the long run (and it usually is), then it is right to do now. If it is a good idea
to eventually diversify your portfolio, then it is a good idea to do so immediately.
Delaying can result in lost opportunities or lost portfolio value.
But There's This Guy ...
Do all investment professionals suggest a consistent
long-term policy? Unfortunately, the aforementioned charlatans do exist. There will always
be people who will suggest a get-rich-quick strategy, often involving some type of market
timing. Why not believe them? Let me remind you that any beat-the-market scheme will only
be successful if only a few people are aware of it. If everyone knew about the system,
then you wouldn't be able to find anyone to buy when you wanted to sell, and vice-versa.
So, tell me this — if you knew of a market-timing
strategy that worked and could bring you unimaginable riches, would you tell anyone about
it? I wouldn't (well, I might tell you, my loyal readers, because there are so few of you
that you wouldn't impact the scheme). Consequently, you should doubt the soundness of any
timing concept that someone is willing to tell you about.
The Danger of Timing
I wouldn't even mention market timing if it weren't so
dangerous. The problem is that bad market timing can obliterate the returns that
most investors enjoyed over the past few years. For example, someone who panicked and sold
at the bottom of the market in March, then bought back last week, would have lost 15
percent in value compared to a buy-and-hold investor. The average return you can expect
from the market is about 10 percent per year, so it doesn't take too many bad timing
choices to cause a portfolio to lose money.
Yes, the weakest link of most people's investment strategy
is their inability to stand firm in the face of short-term market movements and stop
themselves from buying high and selling low. The temptation is understandable, which is
why many investors throughout time have tried market timing despite evidence that they
should not, and suffered for it. Unfortunately, many will continue to do so in the future.
But you are in control, so stop the madness — get into a well-diversified plan that
makes sense for the long run, and stay there.
How Do You Respond?
You may be wondering what to say when someone tries to
convince you that the market is moving a particular way and that you should change your
investment strategy to take advantage of it.
Here's where you should take a cue from TV. Answer
back: "You are the weakest link — goodbye!"
 Lummer's Logic Archives
The information provided here is intended to help you understand the general issue and
does not constitute any tax, investment or legal advice. Consult your financial, tax or
legal advisor regarding your own unique situation and your company's benefits
representative for rules specific to your plan.
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