Missing the big stocks rally: Readers push back
Barry Ritholtz,
Washington Post June 28 2013



Last time, I talked about what investors should do if they sat out the big market rally in recent years. In brief, I advised making changes of both a behavioral and investing nature. The behavioral issues included admitting error, letting go of mistakes, changing news sources, reviewing your process and creating a new approach. The investing solutions were to develop an asset-allocation model, slowly deploy capital, dollar-cost average, rebalance, diversify and invest for the long term.

The pushback from certain quarters was fierce. (Although a lot of readers sent nice e-mails or posted lovely comments about the piece, and I thank you for those.)

Some folks seemed to misread what I had written. Others misunderstood the approach.

So let’s try this again.

Before we wade back into it, let me explain what that column was not: It was not a claim that stocks were cheap; nor was it a suggestion that you must buy stocks now! Indeed, I tried to emphasize that this was not about the next few weeks or even months, but about a timeline measured in decades.

The goal was to engage in a sober discussion as to what readers should be considering if they happened to have missed a once-in-a-generation rally. Toward that end, let’s look at some of the pushback:

●The only way you did not miss the 150 percent move is if you bought at the bottom and sold at the high and invested 100 percent in the stock market.

This is incorrect. To see why, you need to understand three things:

First, you must recognize that you are not a hedge fund, and your goal as an individual investor is not to outperform the benchmark (not that most hedge funds do, but that’s another column entirely). Rather, your goal is to meet some future need, be it buying a house, paying for college or retirement.

Second, if you were in an asset-allocation model, you would have already owned equities and bonds. And third, you would have been incrementally selling equities into the market peak and rotating into fixed-income investments. And you would have been buying equities into the 2009 lows and selling bonds then. That is what rebalancing does.

●The Fed is printing money, and the Dow is heading to 5000!

Thank you for your forecast!

Truth time: How long have you been peddling that Dow 5000 prediction? How many times have you made investments based on that (or other) forecasts? What is your track record? How on earth do you think you know where the market is going to land?

Sorry to have to tell you this, but you just made my point. You missed the Big Kahuna rally by investing based on your own forecasts. This is a terrible approach.

●Count on the fact that you are an outsider and not privy to the insiders’ knowledge or strategy.

Who are the insiders? Billionaire hedge fund manager John Paulson? His funds have gotten mangled over the past few years. Even what is arguably the largest, most successful hedge fund, Ray Dalio’s Bridgewater, is down this year despite a strong market rally.

The so-called insiders have done no better, and in many cases far worse, than you.

●What makes you think you know where the markets are going?

Gee, I thought I made it pretty clear that I have no idea where the markets are going. But investors do not need to know that to invest intelligently. We do understand long-term returns of asset classes and valuation measures, as well as how mean-reversion works. That’s most of the information you need to make an intelligent asset-allocation decision. No market forecasts required!

●I went to all cash on [the day before any recent market sell-off].

The question isn’t whether you got it right on one day. Anyone can randomly do that. The issue for most investors is how much upside they miss waiting to avoid that down day (off 2.5­ ­­percent or worse). And then the follow-up question is simply this: Do you have the tools and the discipline to get back in? In recent years, I have spoken with countless people who managed to avoid the 2008-09 crash but could not bring themselves to reverse direction and jump back in after March 2009. It is an incredibly difficult thing to do and requires enormous skill and discipline.

That’s before we discuss the costs and taxes you pay, assuming you can consistently jump in and out of the market with near-perfect timing. (And the odds are very much against you there.)

●What should investors do if they missed the move in gold from $250 an ounce to nearly $1,900 an ounce?

Good question. As mentioned, if you own a commodity index within your asset allocation mix, you will not have missed that move. But there are other factors about gold worth noting. It produces no income, dividend or yield, so valuing it is incredibly difficult. (Gold is off 35 percent since those 2011 highs you mentioned.)

Second, tradable gold is a tiny asset class. GLD, the Gold ETF, is less than a $40 billion asset. Add in the gold miners (GDX) and you get an additional $7.4 billion; factor in the junior miners (GDXJ), and you get another $2 billion. All told, it’s less than $100 billion (not counting gold futures). Gold bullion, on the other hand, has a total value of over $4 trillion.

●Aren’t you advocating a buy-and-hold approach? I thought you were not a fan of that.

No change of heart — the column was about overcoming the risk aversion that led you to miss a huge rally. I wanted to keep it simple and focus on how emotions can blind logic. Beyond the basic simplicity of the asset allocation approach we took was a more complex entrance-and-exit strategy. There are many variations, all of which attempt to generate better returns by missing some of the downside or getting more aggressive during up moves. But I’ll leave that for another day.

The key to investment success is simple: Have a plan. Follow it faithfully. Max out your tax-deferred accounts. Dollar-cost average. Rebalance. Diversify. And invest for the long term.


Ritholtz is CEO of FusionIQ, a quantitative research firm. He is the author of “Bailout Nation” and runs a finance blog, the Big Picture. Follow him on Twitter @Ritholtz.

Category: Apprenticed Investor, Asset Allocation, Investing

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

9 Responses to “Readers push back: “Missed the rally & still fighting the tape””

  1. MaxMax says:

    I have no idea why people would push back against that.. It’s simple, logical, and straightforward. Of course, it’s possible that I’m a gullible fool who’ll believe anything, but it looked pretty solid to me.

  2. leopardtrader says:

    Many people tend to lament on things they woulda, shoulda done. Imo that is nonsense. It is natural to look back but looking forward will affect lives better than backward.

    In this market every other month/quarter (at least ) new generational top/bottoms are established in some tradeable assets or their combinations. To do is to work hard to locate a few of these in a year and you will be fine. Not easy though so not for the intellectually lazy.

  3. wally says:

    “your goal as an individual investor is not to outperform the benchmark”

    A very important idea. It took me many years to learn this. Even now I get a little ripple of disappointment when I ‘missed’ something. But I don’t need to catch all the waves, only to get enough… which, long term, for me, basically mean to do somewhat better that the rate of inflation.

    • rd says:

      One of the biggest problems I have seen is that the most commonly touted benchmark is the S&P 500 which is a 100% equity index. This give false expectations in rising markets and also sets the long-term expected gain of about 10% which is very difficult to achieve in diverse portfolios. On the otherhand, it does make any sort of decent balanced fund look great in a plunging market.

      One of the things that I regularly check is the performance of my various accounts against Vanguard’s Lifestrategy Moderate Growth account which is a roughly 60/40 balanced fund. They have tweaked it a bit over the years, dropping the active allocation component they had for quite a while and adding international bonds recently. However, IMO these changes now make it a more appropriate benchmark for the individual investor than before.

      One advantage of benchmarking against something like VSMGX is that it include expenses (very low) and is actually achieveable by a small investor by simply purchasing it.

  4. VennData says:

    “…In recent years, I have spoken with countless people who managed to avoid the 2008-09 crash but could not bring themselves to reverse direction and jump back in after March 2009. …And the odds are very much against you there…”

    The odds are one in four. You have two decisions: 1) a sell in 2008 2) a buy in 2009. Two binary decisions are a one-in-four shot. Forget the monstrous illusion you would go “all-in” at both moments (if you got it all out in 2008, grats to you, here’s your coin-flipping champion t-shirt) But if someone is giving you a one-if-four shot every day and CHARGING you for it, they are a casino.

    This means that only an asset allocation with re-balancing (not buy and hold; but buy, hold and re-balance) can you take what the market gives you.

    Four-in-one shots are what a buy-and-sell strategy of any asset is. That is not viable in the long run. if you think otherwise, immediately talk with people, read more, and study until you understand that buy-and-sell will out perform the market one-out-of-four times and under perform three-out-of-four GUARANTEEING you will under perform and simple buy, hold, and re-balance strategy.

    If you have demonstrated that you do not have the emotional fortitude to do this, get an advisor. The one telling it like it is – in public, with his mug on the home page here – is a good place to start looking.

  5. VennData says:

    Bearish Pundits Complain That Too Many People Listened To Them


    See these follow ups do you, as an investor, no good, yet the “source(s)” are still out there yammering away for some reason.

    The evidence points to a certain inertia in punditry, prognostication and political pablum. Jack Welch used to fire the bottom ten percent of managers every year – nine cheers for decimation! – so maybe the media bookers, hosts,and columnists who continue to fawn over Welch and the rest of the coin-flippers should be subject to the same rigor.

    Since they aren’t. You should ignore them (hint: WSJ editorial page and the entire News Corporation empire, newsletter scribblers, axe-grinders, the spewer(s) of “45% of Americans are freeloaders!!!,” that large-font, un-signed, unattributed email from your aunt in Alabama… etc…)

  6. Bob K. says:

    Barry, I get your point. I want to address a comment you made though regarding insiders. I view JP Morgan and Goldman Sachs insiders, not Paulsen, Cohen, etc. They have 100% up trading days for months at a time,(simply not statistically possible without market power or inside information) and get guaranteed profits from their relationship as a Primary dealer trading the spread and front running.

    There is simply no way they do not get inside info, or through the market power they have, to make the market.

    I’d love to see more written on this.

  7. bear_in_mind says:

    A couple of thoughts and comments…

    1) This speaks to, “Having a plan.” I think your over-arching point is spot-on. As a student of the market, and growing-up with family in the real estate business, I suspect you have a much broader sense of finance, trends and cycles than the majority of your fellow American citizens. Thus, when equity or housing bubbles are in the process of inflating then subsequently collapsing, I think the reserves of your experience offer more salient insight than many a Joe Six-Pack or Jane Chardonnay have at their disposal.

    2) This speaks to, “Following it (a plan) faithfully.” The retail finance business is largely structured toward keeping the uninitiated, the under-educated, the ignorant, and the gullible, soundly fixed in those positions, because they provide the easiest route to alpha. They’re fish-in-a-barrel. This is no reflection of you, or many, many others who daily strive to help others to help themselves. But the scales are tipped way in the direction of the vampire squid.

    3) This speaks to, “Investing for the long-term.” Add two 40+ percent equity market crashes, plus a housing market crash, all in less than a decade — and you have people facing a twice-in-a-century phenomenon, something the majority had never seen in their lifetimes. Thus, it’s easy to understand why folks feared losing everything… and many, frankly did. Some were trapped by being over-extended with debt; some had careers and salaries implode and have still not come back; while still others had retired and no alternative other than to withdraw funds at the bottom of a market crash. Long-term logic may tell you to stay invested, but near-term exigencies have a way of altering durational perspectives.

    4) This speaks to “Max-out your tax-deferred accounts.” It’s one thing to talk about fear in the abstract, but it’s quite another when you have a pile of bills and liabilities sitting on your desk which you no means, or hope, of repaying. The last place you’re going to put money is in a tax-deferred account. I’m fortunate that doesn’t apply to me now, but many of us have been there once in their lives.

    6) Those of us hamstrung in a 401/457(k) program with paltry fund choices have a hard time diversifying without paying exorbitant fees. I’ve resigned myself to 65/35 with VINIX / PTTRX, though I’ve changed my future contributions to 85/15 because the outflows from PTTRX are beginning to look worrisome and the guidance from B. Gross and M. El Erian hasn’t helped much. I don’t want to rebalance the portfolio out of fear, but I don’t know that it’s irrational to seek cover from a situation that likely won’t turn into a rout, but isn’t beyond the realm of possibility either.

    In closing, I really don’t disagree with the points you offered. To the best of my estimation, the insight you provided was accurate and sound, but I think the backlash may have come from people who perceived your approach as a bit tone deaf. I’ve read and heard enough of your thoughts that I don’t think that the case at all, but that doesn’t mean others are as well-versed in your commentary and world view.

    • rd says:

      With regards to number 4, there are some interesting aspects of 401ks that make them good vehicles for saving, even if there are a number of unpaid bills out there.

      1. For people in the top quartile, the tax deferred benefits are very big. If your marginal tax rates are in the top couple of brackets, especially if you live in a state with income tax, the tax savings are very large.

      2. If you are comfortable with the stability of your job, tapping into a 401k for a loan with a short payback timeframe (say 2 years or less) is an efficient way of getting temporary access to the savings. In many cases, you are better off saving the money in a tax deferred vehicle with a low probabiltiy of having to access a large percentage of it than to pay the taxes on it and try to save the remainder outside of the tax deferred account.

      3. Hopefully we never need to use this benefit, but 401ks offer much more protection of assets than most other venues (including IRAs) in case of bankruptcy. However, the last 5 years have made it very clear that the social mores frown on non-wealthy individuals using the same tactics used by their creditors as a routine matter of business practice. The drumbeat against rational bankruptcy by individuals has been another tool used by the financial sector to protect their fiefdom.

      4. If you have been part fo a 401k for 10 years, you are separated from the company, and you are over 55 then you can tap into the 401k without penalty. This is useful if it is part of a planned early retirement program.