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Mail Bag – Market Timing, Frozen

As soon as a reader joins The Stock Analysis Mailing List one of the perks is being able to send me a note about what you’re struggling with (investing) and I will either reply directly or write a post about that topic for the reader.

Here is the struggle a recent member emailed me,

Hi Brad,

Ever since 2009 I have been waiting for a “big” pull back which does not seem to come. I am almost completely out of the market and missed all the gains. I believe that the moment I get invested there will be the “big” pull back and I will end up kicking myself.

What do I do?

– Frozen Investor

So let’s start by looking at some facts.

We will assume that our reader sat out of equity investments from January 2 2009 until August 26 2016 (this past Friday). During that time the S&P/TSX Composite Index has returned +58.5%*, the S&P500 has returned +132.8%* and the MSCI EAFE Index has returned +28.5%*
* not including dividends

There have been quite a few pullbacks and corrections of significance (20%+) during that same time period. Our reader needs to also define how much larger of a pullback they are anticipating as each of these corrections was significant enough to participate.

Broadly speaking I have read enough studies over the years to be certain that the cost of waiting for the near perfect moment to invest does not match the perceived or actual benefit. The overwhelming conclusion is that you are far better to be 100% invested over the long-term than to be sitting on a pile of cash waiting. At a minimum I advocate that investors are committed to a certain amount and preferably not in a cash position greater than 20%. There has never been one instance where I’ve caught the absolute bottom on a stock and its unrealistic to assume you can.

But that doesn’t help our reader make a better decision today, because let’s face it…he/she is still not fully invested. The true reason they haven’t committed equity to the markets in the form of a mutual fund, ETF or individual stock is fear.

Fear of Losing Money.
Fear of Losing Opportunity.
Fear of Losing Control.

I was taught by my mentors that I should expect to lose money.

This expectation is not admitting defeat or being negative; but it is the simple and honest truth. Every investor is going to lose money including you.

I know this because I’ve never met someone who didn’t lose money on an investment and that includes all the great investors of our time. Some investors will lose money because they sold too soon, too late or didn’t sell at all. Many investors will lose money because they didn’t buy, bought too soon or bought too late. Loss in inevitable.

No matter how good the fundamentals, the chart, the metrics or business model at some point you need to admit and believe that you will lose money on an investment.

But pay attention, because my investing approach is to minimize losses because I hate losing money.

The reader has a legitimate fear of losing money and wants to maximize the opportunity to make gains. But he/she has a fear to act and that has provided them with a lost opportunity they are unlikely to gain back over time.

So what should they do? How should they act?

This is a question each of my clients battles with no matter how long I’ve been coaching them. My first suggestion is facing the fear of losses and developing a plan to minimize them. This often includes a focus on cost reduction (fees), using low cost index funds/ETF’s, developing a plan of equal purchases over a period of time (dollar cost averaging) and developing a learning plan for future education.


Julie is 25, has $15,000 to invest long-term (10+ years) and is unsure of how to start. She is humble in knowing she doesn’t understand how to assess and value individuals stocks but wants to learn.

Julie reads about The Couch Potato Portfolio. She opens an unregistered account with TD Waterhouse and transfers in $15,000. She will buy equal portions ($2,000) of TD Canadian Index (TDB900), TD International Index (TDB911) and TD US Index (TDB902). She will also buy $4,000 of TD Canadian Bond Index (TDB909) to give herself an initial 60/40 equity to bond ratio for a conservative approach. These are all E-Series funds that charge less than 0.50% with no minimum and an early redemption fee if sold before 30 days. This plan would cost Julie less than $50 per year in fees (not including taxable events) to operate this portfolio.

The remaining $5,000 would be broken into monthly purchases of $100 per fund over a 1-year period. After 1 year she would rebalance each of the funds back to a 20/20/20/40 allocation by selling proceeds in funds above allocations and reinvesting those proceeds into funds under allocation. This will serve two objectives; the first being immediate participation in the market and the second of indirectly timing the market through dollar cost averaging.

In the meantime Julie should continue investing in the same manner (very cheaply and effectively) over the next 2-5 years. For the majority of investors the only significant change would be a switch to low cost ETF’s once their portfolio scaled to an appropriate level where the trading commissions ($9.99 per trade) balanced out to be more affordable than the yearly MER cost.

For the learning plan Julie would designate what areas of fundamental analysis she needs to study (maybe all of it), reading blogs such as this one, reading books and researching how to make unemotional decisions for buying, selling and maintaining positions.

Essentially Julie will put on her Portfolio Manager hat in order to develop the skills she would require to invest on her own. In the end she may be successful in doing so or may decide to remain passive instead focusing her time on other interests.

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