There’s an old story in the investment industry that may be true or may be just a parable–but it certainly is appropriate to remember when the stock market is panicking.
The story goes, a very smart advisor would tell each of the investors who opened an account with her the following:
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“Mr. and Mrs. Smith, today we begin a long journey to build your financial future. Everyone is happy and optimistic as we begin to build your wealth for the long term. We have built your financial plan, and today, we begin to implement that plan. Skies are sunny and waters smooth. But there’s a catch! The day will come when the markets turn down and you begin to second guess all the work we have done. You will forget about the long-term, and focus on the short-term turmoil in the markets. You will be scared, you will think me to be an idiot. You will want to come to my office and throw a brick though my window. And that is okay. If it will make you feel better, please do it. I will even give you the brick to throw. But first, when you have that brick in your hand, when you have taken aim, when your arm is cocked and ready to fling that brick– STOP! Write a check for every penny you have and tie it to the brick. Then you can throw it. Because that, my friends, will be the perfect time to invest!” |
But wait–
While that’s a good story, and one we tell often, it’s not the whole picture. If you wait for the perfect time to invest, you’ll likely miss many, many, days, weeks, months, or even years of good growth in the market.
We believe a better answer to the “When is the perfect time to invest?” question is: “ASAP”.
The magic of compound interest works best for you many years down the road. Every day you delay is a day you put off that magic coming to fruition. Not to get into the math, but you can imagine that 21 years of compounding growth produces a higher number than just 20 years of compound growth. If you take the time to do the math, you might be amazed at what one extra year of compounded growth means in dollar terms.
And my answer of as soon as possible also comes with some conditions.
Get a financial plan.
Developing a real financial plan means understanding all, or at least most of, the risks equity investing presents. Knowing the correct asset allocation is paramount. Too little risk and you may have no chance of reaching your goals, too much risk and you’ll find yourself outside our window with a rock in your hand.
Having a real financial plan gives you discipline, and in investing, discipline is your friend. A real financial plan gives you confidence that no matter what happens in the short-term, you will be okay in the end.
A real financial plan makes life simpler. If you find yourself with extra money to add to your portfolio, you don’t have to reinvent the wheel or come up with some new idea. Your plan already shows you where your money should go. If stocks soar, your plan will tell you when to pull back; if stocks sink, your plan will force you to make the hard decision of “should I buy more”.
A real financial plan provides a more tax-efficiency investment strategy, which gets you where you want to be faster– and with less risk. Investing with poor tax planning is like driving your car with the parking brake on– it slows you down and ruins your car.
If you don’t have a plan, it’s unlikely you have done an adequate job of educating yourself about how markets and money work either.
Folks often fail when they follow a “get a hunch, bet a bunch” strategy. Sure, you hear stories of someone who bet all their money on some company you have never heard of and made a fortune. You have also heard stories of folks who won the lottery and became rich overnight; that doesn’t make buying lottery tickets a sound investment strategy.
So, while I love the story about the brick, I think it misses the bigger picture. Planning, and executing your plan, will create the perfect time to invest. Remember, it wasn’t raining when Noah built the Ark.
