Fighter pilots and market timing

Published: Wednesday, June 18, 2014 at 17:25 PM.

I skewer Eglin and Hurlburt Field pilots but they seem to enjoy the banter. When we go over investment strategies I explain how important low costs are and how important an investment strategy is.  Have a diversified low-cost portfolio and rebalance as new money comes in or your situation changes. Once the hook is set I reel ‘em in. I have one of my mentor Rick Ferri’s books nearby and tell them Rick’s a REAL fighter pilot … a Marine pilot.  Rick has written extensively about investing with all profits going to veterans’ organizations.  

Recently Rick tweeted on market timing and offered the idea it comes in two flavors — intentional and unintentional. If you don’t follow me on Twitter (and all the cool folks do) go to our new and improved website (livingstonfinancial.net) and check the Twitter feed for the entire column.    

Professionals practice intentional market timing by using charts or fundamental analysis. Sometimes they even get it right. Seldom does their foresight last. Market timing means you must be correct twice-when to exit and when to reenter. Then rinse and repeat after every bear market. It simply cannot be done consistently but it’s how they market money management. Sell the sizzle not the steak.

Emotions cause individuals to time the market albeit unintentionally. After the steep 2008 market decline many investors sold in a panic and despite stock trading at record highs investors have been net sellers of stocks. Ferri wonders if the combination of selling during a bear market then watching the market rally scares people away from investing. Since 1990 after every severe bear market it takes about a generation for stock ownership to return to pre-bear market levels. According to data from the Investment Company Institute investors around the world have high cash allocations.  History may not repeat itself but it rhymes.

Having an investment strategy that balances your goals with your risk tolerance, goals and time horizon prevents you from making an emotional decision. Market timing professionals claim “Buy and hold is dead.” Neither Ferri nor I recommend buying and forgetting … it’s buy, hold and rebalance. Between putting new money in the portfolio, taking funds out for living expenses and portfolio fluctuations buy, hold and rebalance forces you into buying low and selling high. But you have to have an investment strategy to make it work.

Supreme Court Throws Curveball

On Facebook local CPA Robert McCullar posted the Supreme Court ruling that an inherited IRA loses creditor protection. To me, the big surprise was the court ruled unanimously. The court based their decision on three differences between inherited IRAs and non-inherited IRAs. An inherited IRA owner cannot make additional contributions and must take distributions plus there are no age-related penalties. 



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