What’s Your Buy Signal?
Earlier this year, I was privileged to attend a local fundraising luncheon to support a good friend’s charitable organization. Like so many of these events, the gathering involved lots of new introductions, mingling and small talk amongst people who will probably never see each other again. I met several interesting individuals over the 2-hour gathering and thoroughly enjoyed the afternoon.
I recall one conversation in particular where the subject veered towards the economy, stock market and impending trade war between the US and the rest of the world. Stock market speculation is a common topic that follows one’s introduction as a financial advisor. This fundraiser took place on March 24th, meaning that the stock market was down about 10 percent from the all-time highs that were established in late January. Furthermore, the months of February and March had seen tremendous volatility as a result of Trump, tweets and tariffs. Compared to the prior 18 months, which had seen unusually smooth gains in both the domestic and international markets, investors were realizing again that markets go both up and down. After each exchanging a few thoughts on the matter, the individual exclaimed:
“Yeah, the markets are a mess right now. I took all my investments to cash last week. This volatility isn’t going away any time soon and I want nothing to do with it.”
Rather than go back-and-forth on long-term investment strategy, I nodded along and let the conversation turn another direction. The main speaker at the fundraiser took the stage a few minutes later and we parted ways for the remainder of the program.
The stock market closed at record-highs last week. Looking at the year-to-date chart, the weekend of that fundraiser was actually the stock market’s lowest point in 2018 (so far). The S&P 500 has gained more than 10 percent since that conversation 6 months ago. I have no idea what is going to happen over the next few months nor do I care to speculate. Volatility is inherent in the stock market and it’s entirely possible that the market closes the year at a lower point than the March 24th fundraiser. Fortunately for me, I’m not in the business of predicting market tops and bottoms.
For some reason, the new record-highs established last week got me thinking about the gentleman at the fundraiser. Is he back in the market? Is he still waiting on the sidelines? What needs to happen for him to feel safe about investing again? Most importantly, what’s his ‘buy’ signal?
I wrote last year about the perils of market timing. In order to effectively time the market, you need to be right twice – selling at the top and getting back in at the bottom. It’s literally impossible to do this consistently over time. Still, this doesn’t prevent people from trying. Market timers often leverage technical charts, historical catchphrases (“sell in May and go away”) and gut instinct when making investment decisions. These approaches occasionally might work, but almost always disappoint over the long-term.
Investors are much more successful when they establish a rules-based system to guide their investment decisions. This removes the two largest impediments to productive, long-term investing– emotion and speculation. This also eliminates the need for an arbitrary ‘buy’ signal when it comes to making investment decisions. For example, millions of Americans follow a rules-based system by saving into their employers 401(k) retirement savings programs. These investors purchase stocks every 2 weeks through payroll deferrals and generally don’t change their approach in the face of market conditions or volatility. Over time, this is an incredibly effective investment strategy.
Financial blogger Nick Maggiulli wrote a great piece last year advocating the investment approach to Just Keep Buying. The idea is to focus on consistent, regular purchases over long periods of time:
Rather than worry about whether now is the right time to buy, just keep buying. Market high or market low, just keep buying. You should think of buying investments like you buy food – do it often. Make it a habit to invest your money like you make it a habit to pay your rent/mortgage. As long as you can buy without paying fees or significant transaction costs, you should continue purchasing assets………Think of it like a snowball rolling down a hill. Just keep buying and watch that ball grow.
Obviously, investments need to be sold at some point. But the decision to sell should be tied to your personal financial strategy and cash flow needs rather than speculative market perspective. Selling should occur to re-balance investment allocations or to create cash needed to fund personal financial goals (i.e. education, travel or retirement spending). Selling out of fear is almost guaranteed to damage your investment returns over time.
Back to my conversation at the fundraiser. This gentleman is not alone in his approach. We see this type of behavior all of the time. Fear. Sell. Wait. Wonder. Investing money is never easy but it’s a much simpler process when emotion is removed from the equation. People who spend their time looking for the right ‘buy’ signal often assume markets are supposed to follow some rational order. We know this is a faulty assumption and it generally leads these investors to sit on the sidelines over time rather than benefit from long-term market growth.