Question: Your comments about keeping emotions out of investing during an election year came a little too late for us. We’re ashamed to admit that we are among those who made changes to their portfolios based on concerns and fears about the candidates. We pulled about two-thirds of our assets out of the market. Could you give me some advice on how and when to get back in when prices are high?
Ric: Your situation illustrates why investors should work with a fee-based financial advisor. When you’re saying, “This is awful! This is terrible! I’m in a panic. Get me out!” your advisor can say, “Let’s talk about this. Let’s think it through.” He or she can provide the hand-holding you need — at the very moment you need it — to prevent you from doing the wrong thing at the wrong time for the wrong reason.
I’ve often said that the investments we provide our clients are no better than the investments they can get anywhere else. So why would we claim that clients might end up better off with an advisor than they might on their own? One reason is that we can serve as a valuable sounding board, helping you think twice before buying an investment you shouldn’t buy or selling one you shouldn’t sell. I believe there’s value in that. So if you don’t think you can keep your emotions in check, hire someone who can help you.
Now you know why I have a personal trainer. I know I’m capable of working out, but I also know that I won’t. So my trainer drags me out of bed, sits me down at the weights and says, “Lift.” And so I do. And he makes sure my technique is correct so I don’t injure myself. Thus, I get could get better results with a trainer than I would on my own — even though I’m using the same set of weights available to me either way. A financial advisor can help you in the same way.
My advice is to put the money back into the market right now, assuming your original portfolio was suitable for you and your situation. That might be emotionally difficult for you, but the money you lost by getting out is simply the price you pay for the education you just received.
If you don’t like the idea of putting all the money in right now, then do it gradually over a period of months. Put in, say, one-tenth every month for the next 10 months. That’s called dollar cost averaging. Once all the money is back in the market, promise to leave it there.
Dollar Cost Averaging does not assure a profit or protect against a loss in a declining market. For the strategy to be effective, you must continue to purchase shares in both up and down markets. As such, an investor needs to consider his/her financial ability to continuously invest through periods of low price levels.