Impatience: Investor’s Enemy
By Saghir Aslam
(The following information is provided solely to educate the Muslim community about investing and financial planning. It is hoped that the Ummah will benefit from this effort through greater financial empowerment, enabling the community to live in security and dignity and fulfill their religious and moral obligations towards charitable activities)
I received a letter from an investment manager recently which recounted his experience with a client. Sadly, the client had fired him, despite the fact that he had accomplished exactly what they hired him to do. It seems that they were frustrated that he underperformed the Dow Jones Industrial Average, which was flying to stratospheric levels, despite their desires for significant income from their portfolio and contingency liquidity needs they just could not face not “getting their share” in a massive bull market.
Sound familiar? Have you or anyone you know complained about not keeping pace with the market? Be careful. Today’s market may be in its latter stages (no one knows for sure until we have the benefit of hindsight), and the folks who beat the market most during the latter stages of a bull market often take a real beating in the bear market that follows.
Back to our story…the dissatisfied client fired the manager in June, 1987—just four month before the 1987 crash. I cannot imagine that the client did better with a new manager that set him off in pursuit of full market exposure immediately prior to the most dramatic market sell off in modern history. The lessons here are many.
This scenario could very easily be happening today. Impatient clients could be fleeing cautious, defensive advisors in favor of more aggressive management. This is the danger of pursuing performance without understanding how the performance is obtained. The time to get aggressive is BEFORE the market embarks on an 80% increase in two years. At this point, it makes sense to be looking for ways to protect the extraordinary gains you have accumulated in 1995 and 1996.
Do not misunderstand, my intent is not to call the top in the market. I put little faith in attempts to outguess the market. However, I believe it prudent to understand some basic things about this investment vehicle we call the stock market. First, history does tend to repeat itself. Beware the advisor who tells you “this time is different.” Second, the market does move in cycles. It is healthy (in the long term) and natural for stocks to go up and down. Third, history suggests that an 80% advance in two years probably puts us closer to the end of this bull market than to the beginning.
Again, do not misunderstand. My suggestion is to be cautious and defensive NOT to simply liquidate your stocks. While this temptation may be great, consider the consequences. If you sell today, you will need to buy back into the market sometime in the future in order to resume your participation. If we do get a correction, or even a bear market, chances are that you will not buy back in at the bottom because things just seem too scary. If you then wait through the bottom, until things feel “better” you will likely buy back in at higher levels than you sold. On the other hand, if we do not get a correction, you will have no chance to get back into the market for anything but higher prices.
Cautious and defensive are two pretty broad terms. In the stock market they can mean several things: buy larger companies that offer more liquidity; buy quality companies that pay above average dividends; buy quality companies that have not fully participated in the market’s run up; buy mutual funds that have below average P/E ratios and above-average dividends; avoid fast-growing, high-flying companies; look for value. Often the best indicator that a market is over-priced, and thus due for a pullback, is a lack of attractively valued stocks.
So, if you have participated in this bull market, count your blessings and look for ways to protect your gains. If you have not been in the market over the past two years, and you are considering getting in now, be cautious…and patient.
(Saghir A. Aslam only explains strategies and formulas that he has been using. He is merely providing information, and NO ADVICE is given. Mr Aslam does not endorse or recommend any broker, brokerage firm, or any investment at all, nor does he suggest that anyone will earn a profit when or if they purchase stocks, bonds or any other investments. All stocks or investment vehicles mentioned are for illustrative purposes only. Mr Aslam is not an attorney, accountant, real estate broker, stockbroker, investment advisor, or certified financial planner. Mr Aslam does not have anything for sale.)