Trent Let Me Down

August 22, 2007

Normally, I’m envious of Trent’s ability to write thoughtful posts over at The Simple Dollar. He could write about cat poo and people would read it. However, today I came across a post of his from last week titled Basic Investing in a Down Market (Or Any Time You Feel Like It), which was written in response to an email from a reader who was nervous about the market. Here’s her email to Trent:

My 401k is heavily invested in growth stock mutual funds (several different ones but all are growth stock oriented).

I’m wondering if it would be a good strategy to move a portion (25-50%) out of these growth funds into a money market fund and wait for the correction to be over before buying back in. I’m not talking about withdrawing from the 401k, just reallocating the money within it, so I can avoid the potential downside and buy back in closer to the bottom. Or I can just close my eyes and hang on, mentally preparing myself to see the decline in value and waiting patiently for it to begin to grow again.

If it matters, I’m in my 40’s, so I’ve got about 20 years before I plan to start withdrawals.

Here’s the first part of Trent’s response:

My philosophy is that the instant an investment makes you nervous, you should pull back into something safer. This is a very conservative approach, but it’s served me incredibly well so far.


If an investment makes you nervous it’s because you:

  • Don’t understand how the market works
  • Don’t have a solid asset allocation plan

or, most importantly…

  • You don’t have your emotions in check

Unfortunately, Trent’s philosophy caters to one’s emotions and has nothing to do with being conservative.

As bad as that first part of his response is, this part is even worse:

If I were Lila, I’d move everything into a money market account for a while and sit on it for at least three weeks, then wait until I started feeling confident about the stock market again – or at least until I felt it was close to the bottom, which I don’t think we’ll see for another year unless there are tremendous cuts in interest rates (this last bit is solely my opinion from having watched the stupidity of the housing market over the last few years).

This is the part that really bugs me: “…or at least until I felt it was close to the bottom.”

It’s anybody’s guess as to when the market is at the bottom. Therefore, don’t worry about it if you are an investor for the long term. Trying to time the bottom of the market will wreak havoc on your emotions, especially if you time it wrong. For instance, what happens if you think the market has bottomed and you move all your money back into it only to find out that it still had room to fall? Or, say the market keeps going up and with each increase you think it is more likely to fall again so you sit on the sidelines waiting for something that never happens? See how silly this can become?

My advice to Lily is to stick it out provided she has a good asset allocation plan. She still has 20 years until retirement, which bodes well for stocks.

65 responses to Trent Let Me Down

  1. Kevin said:

    “You should never invest in something that makes you feel uncomfortable. You should stay in the market during a correction period only if you are comfortable with that.”

    Yes, it’s this kind of thinking that causes so many people to underperform the market and even the mutual funds that they are in.

  2. Getting out when a correction (or even an interesting dip) is really following the scared money — it’s how people go broke.

    If you are in a mutual fund or ETF and the thing is going down and the market is going down — gosh, stay in! Buy more if you can!! You can always use that time to study the market, if you are undereducated about it.

    If you’re in a stock hopefully you know enough to figure out if the stock is going to recover or is really heading for the tank. But the mutual fund or ETF should recover, unless it’s just really turned into a stinker (and thus correcting itself independent of the greater marketplace.

  3. JD:

    you could drizzle the bananas with maple syrup and stick them under the broiler. Or make a banana milkshake

  4. if i woke up in her shoes this morning, yes i WOULD rethink my allocation…
    i’d change it from where it is now, to
    25% Growth
    25% Aggressive Growth
    25% Growth & Income
    25% International

    as far as the market being down, I look at it as the “market” is having a “sale”.. you buy EGGS when EGGS are on sale.. I’d be buying more shares of whatever Fund i was in, because im looking long term, I know over the next 20 years it is going to make money more often than its going to lose money.

  5. How does that type of thinking, investing in what you understand, make people “under perform the market”? You should only invest in what you know. I know that the stock market takes time, which is why I am not putting my money into money market accounts. There are some people out there that just put their 401k money in whatever mutual fund sounded good. I also know that to buffer yourself in down times is to diversify your investments. Some people do not understand diversification. They do not see the different in sectors.

    If you are investing in Washington Mutual or in the financial sector in general, it would be a good idea to reevaluate your holdings. I am personally invest in companies that don’t hold a lot of debt so I don’t think my investments will will be too impacted by the impending credit crunch. I am also diversified in sectors in which people cannot live without.

  6. My paraphrased summary of this issue…

    Lila: “My portfolio is going down and I’m nervous. Can I time this market?”

    Trent: “Sure, all you have to do is move everything to cash now, then jump back in once the market hits bottom. It’s easy!”

    Everyone else on the internet: “You are advising her to buy high and sell low. If she was unable to time the top of the market, why do you expect that she will be able to time the bottom of the market?”

  7. It’s also worth mentioning that getting out of stocks and into cash exposes an investor to both inflation risk and tax risk. Even using a high interest online savings account, staying in cash for the long term causes a person to LOSE money after taxes and inflation. With a 20 year investment horizon, there should be little to no cash in a person’s portfolio.

  8. This is one of the pitfalls of people asking for financial advice from people (or bloggers) who have NO FRIGGING CLUE what they’re talking about, and who SHOULD NOT be dispensing advice. Trent has proven time and time again that he has no idea what the hell he’s talking about. He’s like RK, popular and charismatic, but totally ignorant to matters of finance. I hope he’s well-versed in issues of liability insurance, as they’ll come in handy if he doesn’t stop with this BS.

  9. Kevin: If you’re uncomfortable during a correction, you shouldn’t have invested heavily in stocks in the first place. Obviously, not being in stocks will make it much harder to reach your investment goals, so you better be prepared to save a lot more to make up for the lower returns. However, exposing yourself to more risk than you’re comfortable with is a great way to ensure that you’ll lock in your losses when the market zags instead of zigs.

  10. I don’t really see what emotional comfort bailing on the market gets you. If you’re like me you’d be kicking yourself every day if the market recovered, or agonizing over when and how to get back in if it kept dropping.

    I think the only path to semi-peace-of-mind besides total obliviousness for people who have trouble stomaching volatility (just about everyone) is sticking to your asset allocation.

  11. It’s funny how peope ask for advice from people who have little investment experince other than reading a couple of books on the subject but are excellent communicators. You see the same thing in sales every day. The best sales person is the one that can gain a person’s trust.

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