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Don't Cash Out Of Mutual Funds In A Bad Stock Market
There is never a bad time to swap out an under performing dog of a fund so long as you stay invested (sell, then buy).
I did this at the depths of the tech bust (2002) with a Vanguard "Dud of a fund" (VWUSX). I swapped proceeds into two of their Primecap offerings (VPMCX and VHCOX) and I never regretted the swap.
There's is never a bad time to upgrade your funds. Out with the bad in with the good.
I usually discard faltering funds myself for others I think are a better fit for the sleeve. Sometimes though, I'd like to have had some of my discards back (one being NEFJX).
I remember the jokers from Salomon Smith Barney coming to my workplace during the teck-wreck, making this very same argument. (SSB served as "advisors" --cheerleaders really -- for our 401k, offering monthly "education" [i.e. propagandizing for an equity culture] during lunch at our company.)
About once a year, they tossed out the "you must stay invested, lest you miss out on the few big "up" days...." They were hacks, and the argument is fallacious. And the idea about missing (only) the top up days is a buy and hold MYTH.
The overwhelming number of the biggest up days (%age-wise) in the US stock market, occur during BEAR markets. -- The big up days are essentially violent, but BRIEF counter-trend rallies (probably driven by a combination of short-covering and traders looking to buy, then bank a very quick profit) during down-cycles. Most of of these big up days occured during the 1930's, then again during the 08-09 crisis. Another was in the aftermath of the one-day sell-off in 1987.
It is unlikely in the extreme that an investor would be invested in the stock market virtually all the time, but then haplessly trade OUT of the market just prior to a giant up day, only to then re-enter the market --- and then repeat that same error again and again...
Much more likely: If you are "unlucky enough" to miss most of these big up days, its probably because you also missed a a good piece of the major down moves during which these brief counter-trend rallies occur --- and are thus well ahead of the buy-and-holders.
A good primer on this fallacy is explained in more eloquent detail in the book "Buy Hold and Sell" by financial advisor Ken Moraif (he repeatedly makes the annual Barron's Top Advisor list)
It is unlikely in the extreme that an investor would be invested in the stock market virtually all the time, but then haplessly trade OUT of the market just prior to a giant up day, only to then re-enter the market --- and then repeat that same error again and again...
Much more likely: If you are "unlucky enough" to miss most of these big up days, its probably because you also missed a a good piece of the major down moves during which these brief counter-trend rallies occur --- and are thus well ahead of the buy-and-holders.
A good primer on this fallacy is explained in more eloquent detail in the book "Buy Hold and Sell" by financial advisor Ken Moraif (he repeatedly makes the annual Barron's Top Advisor list)
And if I'm not mistaken, Ken Moraif managed to do just that 2 weeks ago when he gave his "sell everything" order after the market closed on Friday so that anyone who followed his advice sold all their stocks on Monday morning at virtually the worst point possible and all their mutual funds at the close on Monday, not far from the worst, just to miss the crazy rally on Wednesday and Thursday. Of course it's always possible that the trend has changed and this little mishap will be lost in the details, but the taxes those people had to pay on their gains will require a bit more downside before they get back to even.
Much has been made about the difficulty of timing the market, but this guy isn't "just" a timer, he's an "all-or-nothing" timer. That's strikes me as more than a bit risky for the average investor.
I concur that the "all or nothing" seems over the top. I always make my moves in increments. -- But then I may lack the confidence, competence (or hubris) of others. -- Then again, staying fully invested, regardless of price also does not strike me as a strategy to follow if risk/avoiding major capital drawdowns is important to an investor.
As for the sell signal on that Monday (made the weekend before), anybody selling stocks/ETF should ALWAYS use limit orders (OEFs, will of course fill at EOD, which was far above the day's lows).
One follow-up re the "best days" myth -- This week on Moraif's radio program (which is podcasted on his website) he specifically addressed this matter -- and amplified it somewhat. He recently did some research, and determined that the top 60 "up" days occurred during bear markets. --- So ginormous "up" days in the current market environment may not be reason for glee... (unless 'its different this time'...)
I prefer the incremental approach to things myself and I also prefer to increase my cash when I feel like the market is getting expensive. The problem for me, and for most people I suspect, is that figuring out when the market is expensive isn't particularly easy nor is figuring out when the market is cheap again. This is why I prefer a very gradual approach with the main goal being to dampen volatility rather than increase my returns.
I hope when Moraif talks about the top anything in terms of the stock market he's thinking in percentage terms because obviously a 100 point change is a lot different when the index is 1000 vs. 2000. In any event, the impression I've gotten from how he sells this stuff is that all these big days are not just "during" a bear market but they're during a downtrend. Depending on how you define the end of the bear market he might include the 6.4% positive day on March 10, 2009 as being part of a "bear" market. In less than 3 months the market was up 50% so you didn't have to miss the bottom by much to have lost a lot of upside.
Here's a good example. March 23, 2009 the S&P 500 was up 54 points and a bit more than 7%. This was the 8th largest point gain in history and the 4th largest percentage gain in history. Obviously in his mind these were during a bear market. By the time March 23rd happened we were more than 20% off the bottom. Maybe it was still a bear market but these were days you didn't want to miss because we never saw those levels again (so far).
What I've seen from this guy suggests he is extraordinarily good at saying things that, while technically true, make you believe things that are not true. All of those "false" conclusions are intended to make you think you need him and his advisors to help you. I suspect I'd do far better with a used car salesman.
Comments
And if you reinvested your dividends, getting shares that have gone 'on sale' you come out even better.
I did this at the depths of the tech bust (2002) with a Vanguard "Dud of a fund" (VWUSX). I swapped proceeds into two of their Primecap offerings (VPMCX and VHCOX) and I never regretted the swap.
There's is never a bad time to upgrade your funds. Out with the bad in with the good.
I usually discard faltering funds myself for others I think are a better fit for the sleeve. Sometimes though, I'd like to have had some of my discards back (one being NEFJX).
http://mebfaber.com/2008/03/27/noise-the-10-best-days/
About once a year, they tossed out the "you must stay invested, lest you miss out on the few big "up" days...." They were hacks, and the argument is fallacious. And the idea about missing (only) the top up days is a buy and hold MYTH.
The overwhelming number of the biggest up days (%age-wise) in the US stock market, occur during BEAR markets. -- The big up days are essentially violent, but BRIEF counter-trend rallies (probably driven by a combination of short-covering and traders looking to buy, then bank a very quick profit) during down-cycles. Most of of these big up days occured during the 1930's, then again during the 08-09 crisis. Another was in the aftermath of the one-day sell-off in 1987.
It is unlikely in the extreme that an investor would be invested in the stock market virtually all the time, but then haplessly trade OUT of the market just prior to a giant up day, only to then re-enter the market --- and then repeat that same error again and again...
Much more likely: If you are "unlucky enough" to miss most of these big up days, its probably because you also missed a a good piece of the major down moves during which these brief counter-trend rallies occur --- and are thus well ahead of the buy-and-holders.
A good primer on this fallacy is explained in more eloquent detail in the book "Buy Hold and Sell" by financial advisor Ken Moraif (he repeatedly makes the annual Barron's Top Advisor list)
Much has been made about the difficulty of timing the market, but this guy isn't "just" a timer, he's an "all-or-nothing" timer. That's strikes me as more than a bit risky for the average investor.
As for the sell signal on that Monday (made the weekend before), anybody selling stocks/ETF should ALWAYS use limit orders (OEFs, will of course fill at EOD, which was far above the day's lows).
One follow-up re the "best days" myth -- This week on Moraif's radio program (which is podcasted on his website) he specifically addressed this matter -- and amplified it somewhat. He recently did some research, and determined that the top 60 "up" days occurred during bear markets. --- So ginormous "up" days in the current market environment may not be reason for glee... (unless 'its different this time'...)
I hope when Moraif talks about the top anything in terms of the stock market he's thinking in percentage terms because obviously a 100 point change is a lot different when the index is 1000 vs. 2000. In any event, the impression I've gotten from how he sells this stuff is that all these big days are not just "during" a bear market but they're during a downtrend. Depending on how you define the end of the bear market he might include the 6.4% positive day on March 10, 2009 as being part of a "bear" market. In less than 3 months the market was up 50% so you didn't have to miss the bottom by much to have lost a lot of upside.
Here's a good example. March 23, 2009 the S&P 500 was up 54 points and a bit more than 7%. This was the 8th largest point gain in history and the 4th largest percentage gain in history. Obviously in his mind these were during a bear market. By the time March 23rd happened we were more than 20% off the bottom. Maybe it was still a bear market but these were days you didn't want to miss because we never saw those levels again (so far).
What I've seen from this guy suggests he is extraordinarily good at saying things that, while technically true, make you believe things that are not true. All of those "false" conclusions are intended to make you think you need him and his advisors to help you. I suspect I'd do far better with a used car salesman.