Set forth below is the text of a comment that I recently posted to the discussion thread for another blog entry at this site:
A drop does not concern a buy and holder. They are not market timing. They know that the market has always recovered.
Market timers, however, are always concerned with price. They have to be right all the time with getting in and out.
You are describing short-term market timing, not long-term market timing. I disdain short-term timing but I view long-term timing as absolutely essential. You are right that I am deeply concerned with price. Why wouldn’t I be? I am deeply concerned with the price that I pay for cars and sweaters and bananas. Why would I play it different with stocks? But, no, I don’t care even a tiny bit about getting the time that I change my stock allocation right. All that matters to me is that I keep my risk profile constant over time (lowering my stock allocation when stocks become more risky and increasing it when stocks become less risky). If I get the risk profile right, I believe that the rest will take care of itself. At least, that is how it has worked for as far back as we have good records of stock performance (that’s 1870).
I agree that the market has always recovered. If there ever comes a day when the market does not recover, we are all in the soup anyway and what goes on in the stock market will be the least of our concerns. But I think that it is a mistake just to say that the market will recover some day in the future. We all get only so many years to finance our retirement. If you have a big stock allocation and experience a devastating price crash and the market does not recover for a long time, you will miss our on years of compounding. That greatly diminishes your odds of being able to retire at a reasonable age. It makes more sense to always pay attention to price and to engage in the amount of market timing needed to keep your risk profile constant over time. Then all those worries become a thing of the past.
The Buy-and-Holders have a slogan — Stay the Course. I believe strongly in the idea but not in the way that the Buy-and-Holders implement it. To me, staying the course means keeping your risk profile constant even if it requires making some changes in your stock allocation from time to time. It is the risk profile that needs to stay constant, not the stock allocation.
My best wishes to you, Anonymous.
Rob
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