Overheard Conversation on Stocks, Politics and the Economy

“Timing the market is a fool’s game, whereas time in the market is your greatest natural advantage.” – Nick Murray

An actual conversation I overheard this week:

Guy #1: What do you think about the government shutdown and the debt ceiling? Time to get out of stocks?

Guy#2: Stocks have already dropped since early last week. If I would have sold a couple weeks ago I’d be set.

Guy#1: I know. It’s the same thing that happened in 2008. I thought about selling all my stocks, but decided against it, then the market crashed even further in 2009!

Guy#2: I agree. The debt ceiling debacle is the real issue here. I’m sitting on 20% cash and waiting for stocks to crash to put my money back to work.

Guy#1: Only 20%!? I’m sitting in 50% cash right now. And I’m thinking about going to 100% cash. Another crash is only a matter of time.

Guy#2: I know. It’s obvious that the amount of debt that the country has along with the current state of politics and the terrible economy are bound to lead to another market crash.

I winced as I listened to two guys in their 30s have this discussion. Unfortunately, it’s one that probably happens all over the country these days as investors are always looking to make the big score by missing out on a huge loss.

Making these kinds of decisions when you have a time horizon of 30, 40, even 50 years is a fool’s errand.

Market timing is a double edged sword. If you get it wrong, you’re missing out on further gains and losing money from inflation if you are forced to wait long enough. Plus, you will likely be forced to capitulate and buy back in at even higher market levels. Remember, it’s not sell now, buy higher.

But the worst thing that could happen with an amateur market timer is that they luck out and get it right. They win the lottery and sell right before a 10-20% downturn.

Now what? Do you have what it takes to buy back in or will you be stuck on the sidelines always looking for another leg down? Or if you do buy back in will you be continually looking for the next crash that may not come for a long time?

A continuous churning of your portfolio between stocks and cash is a great way to miss out on potential gains and get caught in an endless psychological battle with yourself every time the market moves one way or another.

I’ve had many conversations in the past two years with investors who sold most or all of their stocks in anticipation of another selloff. In most cases, the stress was just killing them every time the market inched higher.  Those kinds of moves can be exhausting on your psyche.

Now, these guys could be right. We could be heading for another crash.

Markets move in cycles. Booms lead to busts. Bubbles lead to crashes. Gains are followed by losses.  Panics and manias will always be present in the markets because they are caused by human nature and that’s never going to change. The pendulum is constantly swinging back and forth.

But do you really want to bet your retirement savings on the actions of a bunch of self-interested politicians? Or on the state of the economy for that matter? Hasn’t the past five years completely debunked the myth that you can make your investment decisions based on the performance of the economy or your political beliefs?

Remember when Obama was elected and everyone said he was a socialist and would be the downfall of corporate America? Well stocks have hit all-time highs and corporations are more profitable than they’ve ever been in that time.

We’ve also seen high unemployment for a number of years now, debt ceiling debates, a downgrade of the US credit rating and constant turmoil in the Middle East.

This is not a political statement on my part one way or another. But here’s a little secret for you…it doesn’t matter who the president is or what the other crazy politicians are doing. They get far too much credit for the boom times and (a little) too much blame for the downturns.

Sure, their policies can make things marginally better or worse but they don’t control what happens with complex markets and economies with many moving pieces (I suppose the Fed is another story, but even they have a terrible track record of smoothing out the ups and downs of the economy).

Politicians can add to uncertainty, sure, but they can’t control the behavior of investors. You can control how much time you spend worrying about the things that are out of your hands.

What matters most is the price you pay for your investments and the amount of time you are in the market over the long-term to earn your piece of the corporate profit pie. That’s it.

Market timing based on fundamentals and the valuation of the market is extremely difficult. Market timing based on emotionally charged political views and what they might mean for the economy is impossible.

The benefits of being in the market over the long-term are so great that trying to pick and choose your spots by going all in or all out makes absolutely no sense at all, especially if you are making those decisions based on factors that have no bearing on the outcomes.

Never invest with your emotions.  Vote that way if you’d like, but don’t invest that way.

In closing I offer you some words of wisdom from John Bogle to put this all in perspective:

All the trading back and forth each day has been called financial pornography. Paying attention minute to minute, hanging on every word, this is not investing. This is trading on what you think other traders will do. How can you tell who’s right and who’s wrong? It’s a casino. Whether it’s Wall Street, the lottery, or Las Vegas, ‘hope’ is not a good investment strategy.

This man will make you rich (Men’s Health)

I wrote a couple more posts this week for Dividend Ninja.  Please read here: SDY: A U.S. Dividend Aristocrat ETF Time to Invest in Emerging Markets? 

Here’s the best stuff I’ve been reading this week:

  • What’s your forecast? (Big Picture)
  • 10 terms investment pros use to raise money (Reformed Broker)
  • The insanity of many financial expert predictions (My Own Advisor)
  • Larry Swedroe with another update on index fund domination (CBS)
  • 10 stealth economic trends that rule the world today (Atlantic)
  • Beware financial comparisons with others (NY Times)
  • A dozen things I’ve learned from John Bogle (25iq)
  • It’s called investing, not gambling (Dividend.com)
  • The importance of rebalancing (CBS)
  • 5 examples of people irrational with money (Motley Fool)
  • Why most traders fail (Reformed Broker)
  • Stocks gain; reasons unknown (WSJ)

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  1. The Dividend Ninja commented on Oct 05

    Thank you for the great posts Ben!

    I’ve really enjoyed your detailed and well researched articles – even if you are an index investor. 😉 Keep up the great work! When are you going to publish your book with Wiley and Sons?


    • Ben commented on Oct 06

      Thanks Avrom. It’s been a pleasure to write for your site and readers.