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On the Horizon

Thoughts, musings, and a little bit of entertainment from the world of personal finance.

Surfing the Markets

5/9/2018

 
We’re several months removed from the shock of February now, and it looks like volatility has settled back in for the long haul.  Perhaps that has some of you out there wondering if you should have listened to the old investing adage “sell in May and go away”.  Several years come to mind in recent memory where that feels like it would have been a sound philosophy; you would have missed the “taper tantrum” of 2015, the debt ceiling debacle of 2011, the other debt ceiling debacle of 2013, and the European debt crises of 2012-.....of pretty much every year.

But the statistics tell a different story.  
Markets are up during the summer months 63% of the time, with an average annualized return of 1.4%.  True, 1.4% isn’t much, but it’s positive. And has been higher than any return you’ve been getting recently on your cash.  Pay attention to this part now, because I’m about to tell you the sure-fire two-part way to make money off your investments: 1) diversification and 2) let it sit there for a long time.  

Investing is a little bit like surfing, if your portfolio was a board and the market was the ocean.  You’re not going to ride any waves sitting on the beach, you’re just going to get sunburned. And yeah, you might catch a couple right in the face on your way out to the break, but that’s just part of the fun.  Let your portfolio sit there. Maybe all it does is bob up and down for a while, but it will be ready when that perfect investment wave rolls in. And if you’re just starting out, use something broad-based and low-cost, like a passive exchange traded fund (ETF) or mutual fund.  You can get a nicely diversified portfolio for under $100 that way. Stay away from the day trading and things that take more than 5 words to explain and that speculative position in Tesla because you read an Elon Musk tweet. Nobody goes to Nazaré to learn how to surf.

If your investing time horizon is five years or more, then spend this summer on the beach with a drink in hand and let your portfolio ride whatever waves might be coming.  If your investment horizon is less than two years, then you’re breaking sure-fire money-making rule number two. That’s not surfboard money, that’s pool float money. Stick it in a high-yield online savings account or a bank CD until you need it, and then spend the summer on the beach with a drink in your hand.  

If you’re looking at a two to five year investment horizon, you’re in the slightly awkward position of needing to choose whether a shortboard or a longboard will give you the best ride given tomorrow’s conditions.  Solution? Bring both. That’s the surfing version of diversification. Allocate part of your portfolio to less risky things that tend to hold value well if the market drops - money market funds, fixed income, perhaps gold - and part to riskier assets - stocks, primarily -  that will appreciate if the market moves higher.

Trying to time the market is a fool’s errand.  What you need to do this summer is make sure your portfolio is correctly positioned given your investment horizon, and then go away.  Just you go away though, not your investments. Summer is short enough as it. Get out there and enjoy it.

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