The Link Between Time And Financial Planning

Growing wealth through investing is based on a simple principle: buy low and sell high. So, the question I recommend people ask themselves is this—what is the best way to buy low and sell high? Some people try to do this by timing-the-market and guessing when to buy or sell. In general, we don’t recommend that approach. Trying to time the market is not easy to do and it’s also not very certain. I prefer a far more certain approach.

Time-in-market is the approach we do recommend. What’s the difference between timing-the-market and time-in-market? The fundamental difference for me is about certainty and data. Time-in-market is a far more certain approach to growing wealth, based on historical and observable data points, than is timing-the-market. Time-in-market is about get-rich-slow while timing-the-market is often about trying to get-rich-quick. We all know how most get-rich-quick schemes turn out.

Timing-the-market is about guessing when a particular investment is about to go up or down so you sell it at the right moment. This is the stuff of day-trading. It’s a whole lot of guess work based on analytics and, quite frankly, hunches. This approach requires active monitoring of the markets and individual investments to make the right moves at exactly the right moment. There are four primary reasons we don’t recommend this approach:

1. Far too often, in my experience, investors who buy in to this approach engage in behavior that produces the opposite outcomes we want to see: buy high and sell low.
2. Most of our clients are family stewards who want to see their wealth grow over time. But they don’t want to expose their investments to too much risk because they worked so incredibly hard to build wealth in the first place. Losing their wealth is a top concern. Timing-the-market is simply too risky for most of our clients.
3. Most of our clients don’t have the time or the desire to watch the markets closely. They’d rather spend their free time with friends and family without having to worry about their investments.
4. Timing-the-market is very hard to factor into long-term financial planning because it is so unpredictable and there are so few reliable data points available.

This is why, for the vast majority of our clients, time-in-market is a far better approach. In this model, we build a long-term financial plan for clients based on reasonable assumptions about market returns. These plans account for all sorts of market changes: up, down or flat. This allows our clients to focus on their careers, families, hobbies and interests without watching stock tickers every day. But more importantly, this model allows for the behavior that really does grow wealth: buy low and sell high.

To demonstrate this point, let’s return to that Microsoft example I mentioned a moment ago. Microsoft began trading on the NASDAQ exchange on March 14, 1986, for .10 cents a share. On November 2 of 2021, it was trading at $331 per share after splitting many times during its history. Microsoft’s stock returns were amazing in the 1990’s, went flat for about 12 years, and then didn’t really take off again until the last five years. As recently as December 28 of 2018, it was trading at over $100 per share. What would have happened to investors who shed Microsoft before 2018? Imagine the kinds of returns they would have missed if they sold the stock during the flat period.

This is a classic example of the value and impact of time-in-market. An investor who bought Microsoft in March of 1986 and then sold in December of 2018 would have seen very substantial rates of return: from .10 cents to $100 (and all the stock splits in between). But they would have had to wait for those returns, to be very patient and to ride out market changes, including the great recession of 2008. They would also have missed out on the huge gains the stock has realized since 2018.

What We Recommend For Periods Of Market Consolidation

Our number one recommendation for periods of market consolidation is to pay even closer attention to your financial plan and your financial disciplines. There is very little that most investors can do to change the markets. But there is a great deal they can do to change their outcomes—positively or negatively. I believe it is wise to focus on those things we can control and to not worry about those things we can’t control. What can our clients control?

• Patience. I believe periods of market Consolidation call primarily for patience. We don’t recommend that most clients make big moves or try to out-perform market average rates of return during these periods.
• Spending. In general, this is a good time to control spending and to avoid any major expenditures unless they are absolutely necessary. We recommend that clients live on a budget and spend less than they earn so they have money to save and invest. Now is a good time to track your actual spending against your planned budgets to ensure you are practicing good financial discipline.
• Saving. If it’s possible, flat markets are a great time to increase your savings. This puts you in a strong cash position and can give you additional resources for investing once the Consolidation period is over.
• Quality. Flat markets provide a good opportunity to review your asset allocation strategy and to possibly make micro-movements toward quality investments. While I don’t recommend a portfolio overhaul to most clients, I do think that quality investments tend to do better in periods of consolidation.

One of the biggest mistakes you can make in a flat market is trying to change too much. There’s often no better strategy than to wait it out. We build financial plans for our clients that anticipate, that have projections built right in, for up markets, down markets and flat markets. We believe that staying the course, sticking to the plan, is the best action to take right now.

Market Sectors We Are Watching Closely

Our clients trust us to make the right moves at the right time for them, based on their financial goals. While I’m not recommending major changes to most client portfolios, we are watching certain market sectors quite closely. These sectors can be attractive in periods of Consolidation. Some of these sectors can yield dividends that are helpful to our clients on fixed incomes or who are looking to preserve investment principle. One of the downsides of a flat market can be a draw-down on principle to support living expenses that exceed investment income returns.

• Healthcare. Because of the debate in Congress to effect drug prices, the healthcare sector could see significant changes. It seems likely that there will be winners and losers in this contest. We will be watching this sector closely to ensure our clients are most effectively positioned.
• Energy & Materials. This sector usually produces solid dividend income in almost any market. We could see oil and natural gas prices go up due to supply chain and overall inflationary pressures. This could produce attractive yields to investors.
• Big Technology. This sector is primarily about companies that realize large profit margins because they wrote their software years ago and continue to reap margins on it. We are tracking several companies that fit this model and could do well in this period.
• Money Center Banks. These should do well because we could see slightly higher rates during this period. I do predict that several companies will see significant growth in the short-term. Money center banks, unlike traditional banks that rely on deposits and lending, tend to transact with governments, large corporations and traditional banks.
• Real Estate. This sector seems to do well in inflationary environments generally. In the US, we have been under-producing single-family homes since the great recession. It would not surprise me to see a surge in home building over the next several quarters simply because demand outstrips supply.

How Can We Help You?

It is my sense that we are likely entering a Rip Van Winkle market or what some would call a period of Consolidation. During this time, I predict market forces will balance each other out as investments trade within a defined range. Our advice for most clients, during times like these, is to stay the course and focus on those things you can control: sticking to your financial plan, controlling spending and saving in line with your long-term goals. This is probably not the time to make big moves.

If you have questions about anything I’ve said here, or if you want to have a check-in on your personal situation, please reach out to me or to your relationship manager directly.