Since the stock market is starting to reach record highs, I am increasingly hearing two things. Both of them are concerning, and I would like to offer a quick word of warning. Since Donald Trump won the election, I am starting to hear a lot of people saying the world is going to end. As a consequence they are pulling their money out of the stock market. The other view I hear is that people are going to start investing more money since Donald Trump was elected. This and the recent stock market run means they don’t want to miss the wave. The quick word of warning I have is please be careful about what you are going to do.
For the people who are going to pull their money out of the market, please look at this link from NYU. Towards the bottom, the statistic that should jump at you is this: if you missed the best thirty days in the stock market from 1981-1998 your portfolio was worth 82% less than if you had your money invested. As far as I know, nobody knew ahead of time what those days were. As far as I know, nobody has ever succeeded with those kind of predictions. If you think you can predict those 30 best days over the next 17 years…well I don’t think there is anything I could say to convince you. Thinking you can time the market like that has lead to the destruction of finances over and over again. Please, don’t be one of those people.
For those of you looking to increase your investments after the recent run-up, please be consistent on your plan. With interest rates bound to normalize, stocks are eventually going to have to readjust downwards. If we have a recession, that is also going to hit the stock market. Be consistent with your approach and dollar cost average through the highs and lows of the cycle. Dollar cost averaging has produced a lot of millionaires in the US. Please, avoid being one of those Morningstar subjects who only achieved 3% annual returns instead of getting the 10% returns their holdings generated because they bought high and sold low.
Just to repeat this, this is just a quick word of warning about your finances. I appreciate a lot of people’s political views. However, I do want people to be smart about how they translate those views when it comes to their retirement.