Charlie Munger is known for imparting much wisdom, one familiar item being “If you can’t respond to a 50% drop in the market with equanimity, you shouldn’t be investing,” something like that.
Studies have been done of the outcomes of selling at lows and waiting to reenter until the market is at highs. For example, one study found that it took 25 years after 1929 for the Dow Jones to regain it’s pre-1929 high. Another study found that it took six years for the S&P500 to regain its 2008 low. Such studies are unrealistic today, where we have sophisticated, real time tools and a broader, more educated investor.
Since these studies use unrealistic extremes, I wonder if anyone has studied what happened when a hypothetical investor sold at -10%, -20%, etc, from the high. And then bought at +10%, +20% from the low, etc. And then varied those results for different portfolio mixes, i.e. 80/20/0, 70/20/10, 60/40/20, etc.
This would be fascinating to see. If anyone knows of such studies, kindly share.
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@John2533 - Welcome to the boards
Over the years, on the Motley Fool boards, folks have shared individual stories e.g. there was a story on the old Berkshire Hathaway (BRK) of a guy who caved in to family pressure to buy/build a pool. He sold some/all of his BRK shares to buy/build said pool, and always regretted the decision. There was another case of a guy and his “need” to have a very expensive musical instrument. The utility value of the instrument’s music was more value to him than the cost. These are but two individual stories. Having said that, are there going to be a lot of folks admitting they bought high, sold low, and then bought back in again high? My thinking, if their individual ports have recovered some, one or two might share the mistakes the “old them” made many years back. I sincerely doubt many would share their mistakes openly.
BTW, why do you think the current investor is “a broader, more educated investor?”
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The typical guideline is that “money you expect that you will need to spend within the next 5 or so years does not belong in stocks.”
This is precisely because of the risk of being forced to sell at a low price to cover an expense. After all, the bill collectors won’t wait for a favorable market.
That said, the downside of such an approach is that if the stock market tends to trend upwards over time, money not invested in stocks is money not participating in that longer term trend.
It’s a trade off. And a big part of being a successful investor is understanding those trade offs and accepting that they’re part of the game. Ultimately, you have to decide what exactly it is that you are investing for. By focusing on those goals, it makes it easier to figure out where along those trade offs you will be most comfortable.
For example, I currently have two kids in college. I invested for their educations in 529 college savings plans. When they picked their schools, the balances in their plans worked out to be just about exactly what a four-year education would cost at their chosen schools, after scholarships. With that knowledge, I shifted the money in those 529 plans from stock based investments to CDs, scheduled to mature around the times the bills would be due.
The result is that they get college educations, debt-free, and I get the satisfaction of being able to pay those massive bills without having to worry about where the money will be coming from. The “downside”, though, is that the market has generally continued to rise, despite the craziness in the world and the economy. As a result, there is the very real possibility that I’m giving up what could have otherwise been a surplus in those 529 accounts upon their graduations.
I’m okay with that downside / trade off. Why? Because the primary goal for that money will be met, and my kids will be able to enter adulthood with educations and no debts hanging over their heads.
Regards,
-Chuck
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