Everywhere I look, there are those with opinions about what to do with your investments. Should you “sell in May, then go away?” (This phrase is suddenly in vogue because it worked the last 2 years, assuming that you bought again in November. However, ‘sell in September’ would have actually worked better, but it doesn’t rhyme so it didn’t catch on). Or does the economy still have legs and this is still a buying opportunity?
The stock market had its worst week of the year last week, and elections in France and Greece over the weekend did nothing to help confidence, so some are saying it’s the beginning of the next crash; others feel that it’s time again to get in.
As I’ve said over the years, if you are a long-term investor, timing the market has serious flaws. If you try to wait for what you think is the low point to buy, or the high point to sell, and you are wrong, you give up a considerable amount of return. This chart shows this: over the past 15 years, had you missed only the best 5 days out of 3,782 trading days, your overall return is less than half of a buy-and-hold stock portfolio. Missing the best 10 days, you broke even. Missing 20 or 30 days, you have now lost money.
No one has a crystal ball. Therefore, the best way to achieve your financial goals is as follows:
- Know your goals and objectives, both short-term and long-term
- Set aside a proper amount of cash which makes you feel comfortable at night and will bail you out if things go wrong in your world, and to take care of any short-term cash needs
- Take care of the things that you can control: saving and spending
- Set up a diversified portfolio to follow your long-term objectives (be it conservative, aggressive, or anywhere in between)
- Revisit the portfolio several times per year and, if your overall goals and objectives haven’t changed, rebalance the portfolio to your original objectives
One last point: have fun! Ultimately, the reason we save is to spend later, so don’t forget to enjoy what you can afford. I’m not advocating spending for the sake of spending, rather budgeting for spending now (vacations, luxury items) in addition to budgeting for spending later (retirement). The easier it is to get to your money (e.g., debit and credit cards), the more likely you will do it without thinking. So limit those opportunities for impulse spending.