Saturday, December 4, 2010

Puttin’ It In & Takin’ It Out Part I: Puttin’ It In

Okay, if you’ve gotten this far (doubtful), know specifically each of your personal financial planning life goals specifically (not hopes, wishes and dreams – dry or otherwise), and there is a deficit overall today to achieving the goal (and the assumptions of the goal are not to be changed), the question becomes how to make payment in to make up the deficit to the objective?
Some believe they can time the market.
As Tony Soprano would say, ‘Furr get about it.’
Studies show for example:

· In the ‘90’s the S&P 500 was up 15%-16% but if you missed the top 10-15 days you were up 5% per year
· If you were invested in all 2516 days in the S&P Stock Index from 1997-2006 you made (before taxes and fees) 8.4% a year. If you missed the 10 best days you averaged 2.2% a year
· In a series of studies from 1994 to 2002, scholars have show that from 1926 to 1993 you had a
0000000000000000000000000000022883557% chance of correctly timing the stock market just 50% of the time

(Besides if you or I could time the market, I wouldn’t be writing and you wouldn’t be reading this – and that’s a 99%+ probability)
So now, given your investment policy statement with predetermined allocations per objective via retrofitting etc., you are either going to change assumptions (amount of the goal after tax, assumed inflation, after tax rate of return, delaying the start of the objective or duration) or you are going to have to fund the objective.
Now the question is not into what investment (see previous section) as that has been determined but how and when – or puttin’ it in (payment) and sequence risk. (Takin’ it out – withdrawal etc and sequence risk will be in Part II)

Think of sequence risk this way. How successful is a guy trying to go to second base when he hasn’t even gone to first on a date let alone cross home plate? How much lovin’ is there without the huggin’ first?
So are you going to go on whim (the ‘loin quiver factor’ as one recovering MOREon called it), all in a (lump sum), or have a sequential formula for puttin’ it in – in periodic payments? If the latter:

· Do I put it in annually, quarterly or monthly etc?
· Is there some other trigger for regular investment? (i.e. the market is selling on a price to earning ratio of 12 would mean a higher monthly payment than when the market is selling at 20 times price to earnings modifying by X% the amount paid in.)

When accumulating I prefer putting it in – in equal amounts (unless transactions costs make it prohibitive)- monthly but no less frequently than quarterly. This is referred to as Dollar Cost Averaging (aka Constant Dollar Plan). Some prefer to put in equal amount of shares on a regular basis which is called Share Cost Averaging. Some prefer value averaging (which is really asset allocation rebalancing on a more frequent basis). The point is – neither you nor I can time the market. If you could, you wouldn’t be reading this commentary and I wouldn’t be writing it. You want to roll the dice, go to Vegas or get remarried without a prenuptial.
Yet, here of some of the but, but, butts I’ve heard for NOW, NOW, NOW

· I’ve got the money – let’s invest it NOW (“Impatience” – money burning a hole in your pocket)
· The inheritance with biblical guilt: I just got this inheritance from my Iron Fist & Velvet Glove Dad and even though I’m just a lucky sperm club member I don’t want to waste ‘the talents’ given to my ‘stewardship’. NOW (Stewardship is the tip off to being a guilt ridden liberal tight fisted with their own money – inherited – but generous with other people’s money).
· The market is getting away from us, so let’s ‘deploy’ NOW (really, is that how you will feel when the market is down 600 points in one day?)
· I’m getting bubkis on money markets NOW
· So I put it in (monthly, quarterly), then I have to rebalance yearly, too much trouble (just do it all NOW)

If you want NOW – join the National Organization of Women
NOW is a Nag – double entendre intended.
NOW becomes HOW NOW Brown Portfolio and I ain’t talking UPS logistics.
NOW originates from the impatient entitlement of ‘give me, buy me, take me’ which itself stems from MORE (itself derived from the palliative for fear of physical extinction: Acquisition).
NOW is the cousin once removed of More – favoring puttin’ it all in immediately without even a kiss or hug.
And remember e.e. cummings statement with slight adjustment, “more, more, more, what are we all MOREticians?”

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