By Tom Bradley
Over the course of a year, we have the privilege of talking to thousands of investors. Most of them are clients, but as a growing firm, we also talk to a good many ‘prospective’ clients.
Of the latter category, there are a high proportion who are mulling over a decision that is much bigger than whether or not to trust their money with Steadyhand. They are out of the market (own little or no stocks) and have to decide when/if they want to become investors again.
It’s to this group that I write today. If you are significantly below your long-term stock allocation, then it’s time to start narrowing the gap. In my recent Globe column, I outlined all the challenges you face, but today I want to get more specific.
Here’s a hypothetical situation:
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Jeremy: 50-years old
- Current portfolio size: $500,000
- Appropriate long-term stock allocation: 60% or higher
- Current allocation: zero
- Required buying: $300,000 plus
For Jeremy to benefit from being out of stocks, he needs to be in during the next up market. Put another way: all the benefits of being out of the market during this turbulent time will be washed away if he’s still not invested during the recovery.
To be clear, Jeremy is taking a huge bet against his target asset mix, and taking off the bet requires that he make the hardest decision in investing (how to get back in). The best advice we can give him is to do it in stages. Perhaps $50,000 at a time. Six purchases over six quarters (today, April, July, etc.). And part of that advice is to do stage one NOW!
Is this recommendation a call on the market? Not in the least. There are some excellent opportunities emerging, but we have no clue where things are going in the short term. Even if we knew there was another 10% downside from here, however, my advice would be the same. Jeremy needs to get started because a 60% allocation to stocks is a long way off.
In implementing his re-entry program, Jeremy has to accept the fact that a number of his purchases will be at less-than-ideal times. A best-case-scenario will have him buying $300,000 worth of stocks before, near and after the bottom of the markets (based on hindsight of course). Note: the best case isn’t purchasing $300,000 at the bottom because for Jeremy, or anyone, that’s impossible. It would never happen.
Given the enormity of Jeremy’s bet, he’s well advised to do a risk analysis that covers a number of different scenarios. He shouldn’t only consider what happens if he does some buying and the market goes down further, and/ or stays down for longer. He also needs to understand what happens if he does nothing and a rally starts tomorrow, leaving current price levels behind forever.
Jeremy has been given a gift. Indeed, all investors who are in the asset accumulation mode have been given a gift. Prices are down and expectations are low. To accept the gift, Jeremy has to get an action plan in place and hit the start button ... NOW.