So much for beginner’s luck. Less than an hour into my first-ever game of Texas Hold’em, I was told that I had no choice but to go “all in” with the last of my poker chips. (The all-in moment is where you put what’s left of your chips into the pot and hope for a winning hand that will keep you alive.) Investors have a choice when it comes to being all in, though it’s often not an easy choice to make.
Market-Timing Relapse
My clients always nod in agreement when I get on my soapbox about the dangers of trying to forecast the direction of the stock market. Therefore, their investment dollars should always be all in. And then it happens: “Barrett, I am coming into some money from [insert windfall situation here], and since the markets are at an all-time high, I’m wondering if I should put it in cash until the next correction happens.” D’oh! One of my clients just had a market-timing relapse.
All-Time Highs
Is an all-time Dow high an event that’s cause for celebration? Yawn. Markets tend to rise more than they fall—you do the math. Participants in a 401(k) don’t generally halt their paycheck deferrals when the Dow hits a new peak. So, don’t bonus checks, stock option proceeds and inheritances deserve the same kind of discipline? Just fold your windfalls into your current, well-planned savings strategy and don’t look back. Even if there is a short-term correction right after you invest, your shares will recover because you were already investing for the long term.
Volatility Aversion
If you think you’ll go “deer in headlights” whenever the windfalls occur, revisit your initial plan with your advisor. Perhaps you’re more averse to volatility than you initially suspected. Yes, I use the word “volatility” instead of “risk,” since I’ve never seen a well-constructed portfolio lose money in a typical person’s investment time horizon. Volatility is your friend. You need it in order to achieve the returns you’re seeking.
The Four-Step Program
- Determine what your bank cash (emergency fund) floor and ceiling amount should be. Then be all in with amounts above the ceiling.
- Systemize and autopilot your savings strategy to whatever extent you can.
- Select a portfolio mix that is suitable for your long-term situation and firmly grasp the volatility that lies ahead—it’s never going away!
- Unless you have a major, unexpected life change, always be all in.
