I’ve been investing money in the stock market for a long time – since I was fifteen.
I’ve read countless books on investing and I fully understand and believe that the best philosophy for making profits in the stock market is to invest for the long term and to NEVER attempt to time the market.
Yet, I had to relearn that lesson the hard way in 2019. Here is what happened:
At the end of 2018, the stock market began to teeter a bit.
From all-time highs in October, the major indexes fell sharply almost 20% by late December.
In 2019, my wife and I planned to buy a house.
The pundits were signaling a downturn.
Not wanting to risk our precious down payment money, I withdrew $5,000, intending to rescue it from further decline.
Unfortunately, I guessed wrong. As of November 2019, we had yet to purchase that house (the tight housing market had made finding a good deal extremely tough).
Meanwhile in the ten months since January, the market had proven the pundits wrong and risen more than 20%.
In other words, trying to time the market had cost me $1000 of free money in ten months (the $5,000 I withdrew would have increased to $6,000 during that time).
It gets worse though.
Not only have I lost that $1000 but I’ve also lost all the future returns that $1000 could ever bring me – whether in the market or in the form of real estate (my home).
If the S and P 500 does in the next forty years what it has done in the last forty (11.56% annualized), this one move will have cost me nearly $100,000 by then ($99,670.50 to be exact).
It’s gone. Forever.
It seemed like a safe play. The market was headed down and at least if I pulled the money out it would be safe, right?
Therein lies the trouble with attempting to time the market. I nor you, nor Jim Cramer know what the market is going do next.
What we do know is that, on a daily basis, the market is up more than it’s down.
Economist Oskar Morgenstern famously compared the stock market to a gambling casino in which the odds are rigged in favor of the players.
In the typical casino the odds are rigged in favor of the house. The more you gamble the money the casino makes. It’s math.
Odds are what make casino owners rich and gamblers poor. They are also what make investors rich and speculators poor.
In 2019, I behaved like a speculator.
I was arrogant enough to think that I could predict what the market was going to do next. I got emotional. Rather than look at the cold numbers, I relied on my intuition. But the problem is that when it comes to the stock market, no one’s intuition is reliable.
The odds are all we have. Supposed insight is worthless.
I want to be clear. If you know you are going to need to use a large amount of cash in the near future, it likely is best to cash it out of the market and remove the risk of loss.
But that is not what I was doing. I wasn’t ready to make an immediate purchase. I was just attempting to shield a portion of my nest egg from further decline. Decline I speculated was coming.
The lesson here is clear. If you have the opportunity to put or leave money in the market, you should. The odds are in your favor. The longer you can leave it, all the better.
If you know you are going to need it immediately, by all means take it out. Otherwise, the more time you give the market, the more likely it is that your investment will grow.
So, in this case I must beg the reader to do not as I have done, but as I say we all should do.
Perhaps my 2019 blunder will prevent you from making a similar investing miscue in the future – one that could cost you, like me, $100,000.
