Gambling on market's future? You might lose chips
Gambling on market’s future? You might lose chips
I can see Lenny from here as he paws his way around this dark, dank catacomb. His face is the color of a dead tooth, and he doesn’t see me yet.
We ended up here in no small part due to Lenny’s inability to play it cool. He’s been counting cards at casinos up and down the East Coast for years, always deep in the game for a little more profit, perched right at the edge of safety and reason awaiting just one more win.
In a conversation about trading strategies, Lenny would be a market timer.
It’s about time
Traders who time the markets are betting that future securities prices will rise or fall in their favor; in essence, they are trying to predict the future.
Having spent two years of my life watching Lenny through binoculars and eavesdropping on his conversations, I am particularly suited to attest to his skill set here.
Lenny bought real estate in Vegas in 2007, he collected Beanie Babies for their “investment value” and in March 2009 he liquidated his portfolio on guidance from a less-than-definitive fortune cookie message: “Sell everything, charity give fish all towel.”
That’s three financial setbacks, if you need a tally. For all of his skill at rigging a table game, no amount of card-counting genius can overcome the pure luck of how a hand is dealt.
At what price?
When timing the markets, traders using technical analysis base their decisions on changes to a security’s price over time.
The theory goes that when an upward price trend emerges, investors might buy into a security, and when a downward price trend emerges, investors might sell that security.
One might wonder: If you’re always buying when the markets are going up, how can you be sure that the trend will continue after your purchase?
Lenny’s eyes land on mine and widen in the dark. His panic, the emotional response to realizing that he’s not alone in this crowded cave, it puts him at a disadvantage.
“How’d I get down here? Do you live in this place? Maybe you know a way out?” His voice wavers in a way it never had at blackjack, and he’s fast to back himself against the stone wall, fingering the rock for any loose pebbles, any lever, maybe a doorknob.
Ever look for something when you’re in a state?
Average investors who believe that timing the market works often succumb to fear and sell securities at lower price points.
At the same time, they aren’t immune to catching a little market euphoria in up-markets, often making purchases at unreasonably high price points.
Market timing can often lead to lower portfolio returns due to the emotional stake of the trader in the portfolio. Some analysts believe that the best performing portfolio is one that has simply been rebalanced regularly and minimally changed otherwise. Others disagree.
Know when to hold ’em
A buy and hold investment strategy eliminates many aspects of market timing, often ameliorating the impact of emotion on a portfolio’s returns.
An investor chooses a risk level that will guide him/her to buy and hold certain asset classes in amounts that should correspond to the investor’s risk tolerance.
An underlying theory supporting the buy and hold strategy suggests that stock markets have historically gained in value over time despite volatility.
Many investors fond of buy and hold, rely on “rebalancing” a portfolio to ensure a risk tolerance consistent with his or her wishes.
Rebalancing a portfolio often means taking profits from overperforming asset classes and buying into underperforming ones so as to maintain the original risk level.
While the water’s warm
Lenny began counting cards at the suggestion of an entrepreneurial gangster, and I began following Lenny around because the casinos pay me well to track hucksters like him.
The moral here is that because we were each particularly suited for our respective roles, a little outside encouragement is what finally got us in the game.
Staunch supporters of market timing and of buy and hold strategies may make their case for why you should choose one over the other.
Regardless, whether the decision is yours or one you’ve gleaned from the unfortunate translation of a supposed “fortune” cookie, the fact remains that for many investors, simply being invested in the markets might be an easy and reasonable first step to take.
If you’re wondering how Lenny and I make it out of this pinch, you can followme the next time we go Into the Noir. But not too closely; you might have been followed.
Anthony M. Conte, MSFS, CFP is a managing partnerwith Conte Wealth Advisors LLC in Camp Hill, 717-975-8800,email@example.com. Registered Representative Securities offered through Cambridge Investment Research Inc., a broker/ dealer, member FINRA/SIPC. Investment Advisor Representative Cambridge Investment Research Advisors Inc., a Registered Investment Advisor. Cambridge and Conte Wealth Advisors LLC are not affiliated.
The opinions expressed in this column are solely the writer’s and do not reflect the opinions of The Patriot-News. Before acting on financial advice, readers should consider whether it is suitable for their circumstances and consider seeking advice from a financial or investment adviser.