Know thyself: it’s the key to riches.
Many people think they have the stomach to endure the gut-wrenching rollercoaster of the stock market.
They see the stock ticker on TV from time to time, and it doesn’t look so scary — just numbers, right?
Then they put their hard-earned cash on the line, and the story suddenly changes.
From the Wall Street Journal, March 8, 2011, Where to Put Your Cash Now by Eleanor Laise:
Joanne Courville is among the investors torn between their fear of risk and their loathing of low yields. Last summer, the 52-year-old director of alumni relations at a university in New Orleans moved about half of her 401(k) balance into a money market fund. “Then I realized I was making 0.03%,” Ms. Courville says. She has since moved some money back into annuities and stock funds, but “I’m still scared,” she says. “I don’t want to lose everything I worked for.”
Stop for a second and consider the dates in this blurb. Joanne is 52 years old, meaning she’s been in the market for awhile. Most likely, her 401k experienced the spectacular highs – and the even more spectacular crash – of the Year 2000 dot-com bubble. For most of the next decade, her 401k slowly recovered from the dot-com crash, until by 2007 she had regained everything she lost — only to lose it again, in an even more spectacular crash that heralded the Great Recession.
She kept a strong will — and an even stronger stomach — and managed to hold her portfolio through the bad times, through the lows of 2008 and 2009. But then, as the WSJ story says, she sold half of her holdings LAST SUMMER. That means Summer 2010. The beginning of the good times. The start of the rally.
This is the risk of not “knowing thyself.” If you misjudge your risk tolerance — if you think you can handle those wild ups and downs better than you actually can — you risk experiencing the crash, as Joanne did, but exiting the game before the recovery. (Take the Risk Tolerance Quiz to find yours).
Joanne’s next move is an attempt to un-do her moment of weakness:
“She has since moved some money back into annuities and stock funds.”
Again, consider that. In July 2010, the Dow Jones Industrial Average stood at 9,600. She sold her stock fund holdings near their low point. Then the market started to recover. It rose. Later that summer, the Dow crossed 10,000 — that magical barrier between being a 4-digit number and a 5-digit number. Everyone became hopeful. Then it fell back down. Then up. Then down.
By October 2010, it had crossed the 11,000 mark. It grew consistently higher from that point. By the time the WSJ story published in March 2011, the Dow is above 12,000. (Update: Two years later, in 2013, the Dow is almost at 16,000.)
Let’s assume Joanne sold her holdings in July, when the Dow was at 9,600, and bought it again in October, when the Dow stood above 11,000. That means in those three months, she missed the biggest rally of the past 5 years.
Here’s the truth: you can’t time the market. You never know what it’s going to do. So don’t waste your time knowing the market; instead, spend your time knowing yourself.
Pick and stick with your stock funds “For Better or Worse.” Make the commitment if you can — or declare that hey, you’re just not ready for this kind of commitment.
Otherwise, you might end up like Joanne.
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