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Two thoughts on market timing

July 31, 2020

Trying to time the market has a characteristic of a two-step dance: it doesn't really matter if you land the first step if you miss the second.

2020 offers an example. Say you predicted the harmful economic effect of the coronavirus in January or February and sold all positions into cash. This remarkable timing would have made you feel either quite smart or quite lucky. But there's a decent chance the March crash also made you feel quite frozen, and herein lies the problem.

If your goal was to outperform, to benefit from market timing, you needed to be correct twice in a row. You could not take the first step (selling) and skip the second (buying back in). In the 2020 scenario, if you missed that second step, the timing of which occurred just a month later, you accomplished approximately nothing. Well not nothing - you may have generated a tax bill from Uncle Sam.

An additional market timing problem: selling a stock, or an index, at the top of a bull market. You cannot predict the crest, and bull markets often will soar as they expire. As a result, if you sell too early, you can miss a substantial portion of the gain.

Selling investment positions tends to be harder than buying them. You may buy an investment, and it may go lower, but your error maximizes at 100% 1. On the other hand, an investment could rise by hundreds of percent before it peaks. This mismatch highlights the difficulty of timing on the sell side.

Your best bet? Stay the course.

Dan Cunningham

1 Assuming it is not bought with leverage.

The U.S. Government opens the door for the financial industry in 401k

July 17, 2020

To us, it seemed like an attempt to find middle ground between confusion and chicanery as current U.S. Department of Labor Secretary Eugene Scalia described his proposed changes for Americans' retirement plans: "[They] would give Americans more choices for investment advice arrangements, while protecting the retirement savings of American workers."

I like the "arrangements" word. I have a choice pile of documents sitting here on my desk from the industry that comprise those "arrangements." They include, as this article points out, commissions, 12b-1 mutual fund fees, trailing commissions, sales loads, mark-ups and mark-downs, and revenue sharing payments from investment providers or third parties.

And the Department of Labor just allowed annuities into retirement plans via the Secure Act of 2019.

"Protecting retirement savings?" Sorry. Annuities and whole life insurance may sound compelling (particularly if you're a highly paid salesperson who likes to spread fear of uncertainty instead of disclosing your commissions or comparing your products to low-fee index funds), but more obscure fees do not protect anyone's retirement.

It gets worse. The government is also proposing to allow leveraged private-equity funds into Americans' retirement plans. The average investor on the street has little time or inclination to examine the leverage ratios inside those private equity investments. Looking at return numbers without understanding leverage is meaningless.

What do they propose should be difficult to include? Environmental, Social, and Governance (ESG) investments, because they don't focus solely on profits.

In a normal environment, choices are good, even if you don't agree with the choices - the "free" in "free market" is, after all, important. However, information clarity and lack of friction are also critical ingredients for a free market to operate. Today, Americans' retirement plans, care of the financial industry, have neither. This will have the practical effect of defaulting many workers into products they don't understand, for which they pay too much, which they'll discover are difficult to exit.

We run 401k and 403b plans for businesses and non-profits. Take a look at our retirement site here and let us know if you are interested in an Advisor evaluating your workplace plan.

Dan Cunningham

Think Advisor: Dept of Labor Floats Revised Fiduciary Rule 6/29/20

Bloomberg: private Equity Abuzz over Access to $6 Trillion 401(k) market 6/26/20

Bloomberg: Matt Levine: The Government Wants ESG Out of Pensions 6/25/20

Walt Whitman and the United States

July 3, 2020

"Do I contradict myself? Very well then, I contradict myself. I am large, I contain multitudes." ~ Walt Whitman, 1855.

Welcome to the United States.

We're a vast nation. Arguably two nations jammed together by necessity and then war, converging gradually but not smoothly. It can be tough. 2020, with its soothing repetition of 2's and 0's, has been anything but. The chaos feels like a lingering headache. But it's not all bad.

Our disparate people bring strength, and those differing viewpoints create opportunities. Throughout the 1970's, hippies traveling across the plains to California had to buy beads from someone (I mean, they had to!), and that someone who saw the need was the founder of Hobby Lobby, a business that grew into anything but hippie.

In the markets, all day long differing opinions swirl. Almost by definition - one person selling is another person buying, and they have opposite outlooks on the future. But hostile it's not - commerce and communication bring pacification. When you trade with someone, you begin to communicate and understand them.

We're too big, too opinionated, and a bit too swashbuckling as a culture not to have our differences. But diversity and peace are powerful forces. Among our contradictions, we can have them both.

Have a relaxing Fourth,

Dan Cunningham

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