From the Dow Jones Industrial Average reaching 26,000, to Bitcoin prices surging to nearly $20,000 (and back below $10,000), the markets have been in full swing, exciting many investors. With all of the commotion, I have been approached daily with questions surrounding where I think the markets are going and what clients should do with their investments. As this is my job, I don’t have any problem answering each and every one of those questions, but I will be frank: I don’t know where the markets are going. If I did, I would be on a beach somewhere on a laptop making millions of dollars for myself. However, as my title shows, I am a financial adviser. I advise people in regards to their finances, and as part of my job, I focus on how my clients react to these market moves.
Many investors will simply say that the key to investing is to “buy low and sell high.” While this may seem easy enough, it can be a very complicated thing to do (please refer back to the beach story). In actuality, market timing is not only hard to do, but can be extremely costly. For example, let’s look at the past year. As the S&P 500 displayed returns of over 20 percent in 2017, throughout the year I received many inquiries from clients asking if the market was too high and if they should pull all of their money out and sit on the sidelines. Many clients are not using data to justify that the market is “too high” other than the fact that the market has gone up. Conversely, when the market goes down, there will also be clients who want to pull money out of the market, just like they wanted to pull money out when it was high. I consider this to be emotional investing rather than sound investing. The hardest thing about trying to time the market is that not only do you have to time when to get out — you also have to time when to get back in.
The main point of this article is not to tell investors that they shouldn’t ever sell out of things that go up, or sell out when things go down. The point is to be aware that keeping a long-term approach in the market will most likely be the best option for you as an investor over time. Be as exposed to stocks and bonds in the correct allocation that you can tolerate and stick with it over the long run. As you get closer to retirement or closer to a time when you will need funds, you should start de-risking your portfolio so that you can take money out of your account without worrying that you are pulling it out at the wrong time. Simply put, investing on a hunch is not something that I would recommend. Your portfolio should be based on your income needs and risk tolerance. As long as you have enough investments to supply your income without the risk of pulling money out of the market at the wrong time, your risk tolerance should determine how the rest of the money should be invested.
Hunter Larson joined D.A. Davidson in 2015 as a research associate before accepting a position as financial adviser in Aberdeen.