Written by: Corey Janoff
This post originally appeared on March 14th, 2017 on our previous blog website, www.financialclarityblog.com. It has since been revised and updated. I felt this was a timely piece worth re-reading given the current environment we are in. This particular blog post looks at the concerns of a couple of individuals about investing in stocks, fearing a potential decline in stock prices across the markets. The purpose of revisiting this blog post is to reiterate that it is darn near impossible to predict the short-term movements of stocks (and most investment for that matter). Continue reading to learn more!
Over the past month or so I have been asked numerous times by clients if now is really a good time to be investing their money in stocks. I have one client who said she wanted to pull her investments out of stocks and move all of her money to gold, because she is concerned the stock market is going to tank and thinks everyone will flee to gold and drive up gold prices. Another client wants to move his money out of stocks and into bonds, not add any more money to his retirement accounts, and wait until the stock market crashes and then he will buy back in. These are just two examples (I have spoken to a number of other people with similar thoughts).
If these two particular individuals are correct in their predictions, then those moves could work out beautifully. However, in both scenarios, they have to guess right twice. Both have to correctly predict that stocks will decline in the near future. The first person also has to correctly predict that gold will be a solid investment. After selling out of stocks, the second person has to then subsequently predict when the stock market will begin to rise again and buy back into stocks right before that.
But what if these two people are incorrect? Then what? If they go through with their plan and the stock market continues to rise, how long will they wait to reinvest their money back in stocks?
Two Questions for You
Like most people, both of the above individuals read/watch the news and are concerned with how current events will impact their investments. Rightfully so! Investors have been seriously burned twice in the last 20 years when investing in stocks.
With the domestic stock markets at all-time highs, the political uncertainty, and all the craziness going on in the world around us, is investing now a smart move?
Whenever I am asked this question, I’ll turn around and pose two questions:
- What are you investing this money for?
- What is the time horizon on this investment (i.e., when will you need the money)?
Depending on the answer to these questions, I can help a person determine if now really is a good time to invest.
What Are You Investing the Money for?
Most of my clients are still in the early stages of their career and are investing primarily for their retirement and college for their children. If you are a 35 year old, you probably are a little ways away from your retirement party. If you have young children, you probably have 10+ years until they will be headed off for college. I would consider both of these investments long-term in this particular scenario.
If you are investing money to be used as a home down payment, or plan to take a sabbatical this summer and travel the world for several months, you probably need to access some funds in the near future. That would be considered a very short-term investment.
What is the Time Horizon on This Investment?
If you have a long time horizon until you need your money (10+ years), the current events today will likely have minimal impact on the long-term results of your investments. Short-term, almost anything can cause prices to fluctuate. Stock prices are simply a matter of supply and demand and investors’ emotions can quickly skew the supply/demand curve. If there are more buyers than sellers, prices go up. If there are more sellers than buyers, prices go down. Long term investment results, however, are based on the success and profitability of the companies and assets you are investing in.
Remember several years ago when the Ebola virus was going to wipe out half the world and we all had to fear for our lives? Ebola was going to have a major impact on our investments and in the short term, the stock market took a dip. Today, most of you probably forgot about Ebola and also realize that it hasn’t had any lingering effects on your investments.
If you don’t need the money in the near future, we can likely afford to take on the risk that is inherent in various investments. If you are a 35 year old and your retirement investments decline in value next year, it’s not fun to look at your account statement when you receive it, but it’s OK. You probably aren’t retiring next year, so you have plenty of time to let the investments rebound and (hopefully) grow over time.
Warren Buffett has said if you invest in the stock market, it should be with money that if the stock market were to close for 10 years and you couldn’t get to your money, that would be OK. That is kind of what a 401(k) or other retirement plan is like when you are under the age of 50. The IRS penalizes people for tapping into retirement accounts before the age of 59 and a half years old.
Back to My Two Clients
With the two client examples I cited earlier, both are physicians in their mid-30’s and have under $100,000 invested for retirement. Both entered practice within the last few years, so haven’t had much time to invest until recently.
Looking at their financial situations and the time horizon on their investments, they have a ways to go before they are in a position to retire. Even if the stock market does decline by 50% in the coming months and they then have under $50,000 invested, their financial picture hasn’t changed much. They still have a ways to go before they will be in a position to retire!
The bigger concern should be whether or not they are adding enough to their investment accounts on a regular basis so one day they have a fighting chance of being able to retire. If they stop investing now and wait six months, a year, two years, or however long it takes until they feel the time is right, that could exponentially push back their targeted retirement date.
For a 65 year old who is retiring at the end of the month and has $4 million in retirement assets that are 100% invested in stocks, a major stock market decline would have a significant impact on his financial picture. In this scenario, the time horizon is a lot different, so the accounts should be invested differently. 100% stocks probably isn’t appropriate for this particular individual.
Summary
Investing is all about the goals for the investment and the time horizon you have until you need your money. If we need the money soon and cannot afford a decline in value, then we should invest accordingly in areas that have minimal (or zero) downside risk. If we have a long-time horizon until we plan on accessing the money and need it to grow significantly to reach our long-term goals, we should also invest accordingly in assets that give us a chance of growth over time. So whenever you are faced with an investment decision, ask yourself those two questions:
- What am I investing this money for?
- What is the time horizon on this investment (when do I need the money)?
That should help you determine how to go about investing the money.
Disclosures:
These are the opinions of Corey Janoff and not necessarily those of Finity Group or Cambridge Investment Research, Inc., are for informational purposes only, and should not be construed or acted upon as individualized investment advice. Any examples are hypothetical and for illustrative purposes only. Past returns are not indicative of future results. Any investment involves potential loss of principal.