Bogleheads® 2022 Conference – Bogleheads University - Principle 5: Never Try to Time the Market
00:00:00.000 | (audience applauding)
00:00:03.160 | - All right, our next speaker today
00:00:09.000 | is hopefully well known to all of you.
00:00:11.540 | Rick Ferry, MS, CFA, is the president of the Bogle Center.
00:00:16.440 | He has a 35-year career as a financial advisor.
00:00:20.960 | He is the founder of two successful
00:00:22.880 | financial advisory firms.
00:00:24.520 | He's the author of seven books on investing.
00:00:27.480 | He was a Marine, I don't hold that against him,
00:00:30.040 | but he was a Marine aviator.
00:00:32.000 | And he has made 9,547 posts on the Bogleheads forum.
00:00:37.920 | (audience applauding)
00:00:40.520 | Rick Ferry.
00:00:41.360 | - Thank you, Jim, and thanks everyone for being here.
00:00:51.320 | It's been a wonderful event.
00:00:52.620 | You'll hear some more remarks from me tonight
00:00:54.860 | during our reception.
00:00:56.420 | But I wanna get right into what I have been tasked
00:00:59.120 | to do today, this morning, or this afternoon.
00:01:02.400 | And that's two things.
00:01:03.400 | Number one, I'm talking about never try to time the markets.
00:01:06.360 | And then I'm gonna roll right into the next one,
00:01:08.720 | which is number six, which is why you should be using
00:01:11.860 | index funds whenever you can.
00:01:13.420 | So let's talk about timing the market.
00:01:16.620 | This is a picture of the market.
00:01:20.220 | By the way, I am a Marine, okay?
00:01:22.980 | We work better with pictures than words.
00:01:26.300 | (laughing)
00:01:27.640 | Like some, my son-in-law is Army,
00:01:30.800 | so he says, "When you went to OC yesterday,
00:01:32.840 | they give you a box of crayons?"
00:01:35.780 | Anyway, so we take a lot of Marine jokes,
00:01:38.800 | but we get our points across.
00:01:41.120 | So this is the stock market, right?
00:01:42.920 | Normal market, the market fluctuates.
00:01:46.520 | You cannot predict the market,
00:01:48.000 | but you can predict that it will fluctuate.
00:01:51.400 | And I don't know whether tomorrow it's gonna be up or down.
00:01:54.320 | I don't know next month, next week, next year,
00:01:56.320 | whether the market's gonna be up or down,
00:01:58.160 | but I know it's gonna be one direction or the other
00:02:00.280 | because it fluctuates.
00:02:02.800 | So that, we can say, is predictable.
00:02:05.280 | Where it's going is really not predictable.
00:02:09.080 | In fact, this chart is interesting
00:02:12.140 | because every single year,
00:02:16.000 | and this goes all the way back to 1980,
00:02:19.540 | the market both goes up and goes down.
00:02:24.100 | Every year, on the bottom where you see the green,
00:02:27.040 | that's the amount that the market went down,
00:02:29.640 | and on the blue, that's the amount the market went up,
00:02:32.780 | and then the net amount was where it ended up.
00:02:35.680 | So markets go up, markets go down, okay?
00:02:40.680 | And who's to say during the middle of the year
00:02:44.920 | where it's going to go tomorrow?
00:02:47.040 | I don't know where it's going to go.
00:02:49.640 | I know there's a lot of people who say they know,
00:02:53.980 | but there are also people who know they don't know,
00:02:56.000 | and I'm in the category of knowing I don't know,
00:02:58.360 | and it's worked out really well for me
00:03:00.600 | because then I can do disciplined investing,
00:03:04.040 | which you've already heard about.
00:03:06.040 | So every year there are rallies.
00:03:08.040 | Every year there are declines.
00:03:09.280 | We just don't know when they're gonna begin
00:03:10.560 | and when they're gonna end and how big they're gonna be.
00:03:12.380 | Other than that, investing is easy, right?
00:03:14.740 | Also, what is it that we do as human beings?
00:03:21.760 | Wherever the market has just recently been,
00:03:25.640 | we react to that, okay?
00:03:28.360 | When the market is high, we're happy.
00:03:31.440 | We're happy.
00:03:32.800 | My former partner from years ago used to say
00:03:35.480 | it's odd that when something gets more expensive,
00:03:37.880 | people want to buy more of it, okay?
00:03:41.600 | But that's not true, let's say, of the housing market.
00:03:43.400 | Everybody's saying, oh, the price of housing is so high,
00:03:45.800 | you know, I don't know if I wanna buy now.
00:03:47.360 | I wait 'til it comes back down.
00:03:48.800 | But it's funny, with the market, when things do come down,
00:03:51.160 | people say, oh no, I don't wanna buy now, might go lower.
00:03:54.960 | This is a terrible place to buy, and start panicking.
00:03:57.040 | So, you know, reaction to the ups and downs of the market
00:04:01.480 | are very emotional, right?
00:04:04.040 | And you can't let your emotions drive
00:04:07.560 | when you're going to get in and when you're going to get out.
00:04:10.560 | By the way, this is from the Investors Intelligence,
00:04:14.600 | Bulls and Bears, and just to illustrate
00:04:17.000 | what I'm talking about.
00:04:18.180 | So, when this red line is very high,
00:04:21.520 | people are very bullish.
00:04:23.760 | And if you were to overlay this on top of
00:04:25.960 | where the market is, you would see that
00:04:28.260 | people are very bullish about stocks
00:04:30.500 | after stocks have already gone up.
00:04:33.880 | And here we are now, this is actually the end of September,
00:04:36.920 | people are bearish.
00:04:38.400 | You look along the bottom, the average investor
00:04:40.920 | is very bearish after the market has already gone down.
00:04:45.040 | Okay, but is this predictive of anything?
00:04:47.920 | The answer is no.
00:04:49.140 | There's no predictive value at all in this information, zero.
00:04:54.140 | That has been proven time and time again,
00:04:56.920 | where people think the market is going to go,
00:04:59.360 | and where it actually goes, there's zero correlation
00:05:02.800 | between those two factors, okay?
00:05:05.480 | So, but we feel like the market's going down,
00:05:09.040 | and the market has gone down,
00:05:10.560 | therefore we believe it's going to go down.
00:05:12.940 | In fact, people will often say to me,
00:05:14.880 | "Why should I invest now, the market is going down?"
00:05:18.600 | And my answer is, "I don't know where it's going.
00:05:22.280 | "I know where it's been, I know where it is,
00:05:26.260 | "but I don't know where it's going."
00:05:29.040 | And there's a big difference.
00:05:30.480 | In the long run though, if the world stays in
00:05:36.440 | some sort of a normal growth pattern,
00:05:42.820 | in the United States, if we stay in a normal growth pattern
00:05:45.560 | for our economy, where eventually corporations
00:05:50.560 | earn more money, eventually productivity increases,
00:05:54.840 | maybe trade increases, our GDP,
00:05:58.080 | which is a measure of all this, adjusted for inflation,
00:06:01.480 | goes up, eventually this gets reflected in the stock market.
00:06:06.480 | So the only thing we really need to worry about
00:06:09.600 | is the world economy going up,
00:06:13.620 | is it going to go up over our lifetimes,
00:06:15.420 | our children's lifetimes, our grandchildren's lifetimes,
00:06:17.580 | and that I'm willing to make a bet on,
00:06:19.580 | because the alternative to that is not pretty.
00:06:23.120 | So I am gonna be optimistic and say,
00:06:25.420 | I believe global GDP growth will continue,
00:06:30.420 | I believe our growth in this country will continue,
00:06:35.540 | and because of that, corporations will make more money,
00:06:39.160 | adjusted for inflation, and because of that,
00:06:41.700 | that will ultimately get reflected in higher dividends,
00:06:45.260 | and the stock market will eventually go up,
00:06:48.780 | and I have to believe that, not only for myself,
00:06:50.920 | but I have to believe that for my children,
00:06:52.540 | and my grandchildren, and my great-grandchildren,
00:06:54.480 | and generations beyond, because if we stop believing in that
00:06:57.880 | then we got a problem, we're gonna have a real problem,
00:07:00.460 | you should be buying lead, you know,
00:07:02.820 | brass, things like that. (laughs)
00:07:05.460 | Okay, so in the long run, equity returns do come out
00:07:10.460 | of this global economic growth,
00:07:12.960 | so even if you don't buy it at the right time,
00:07:15.240 | okay, if you wait a while, you'll be fine in the long run.
00:07:19.360 | So, great quote by Benjamin Graham,
00:07:24.060 | Jason Zweig knows the quote very well,
00:07:27.720 | because he re-edited a book, or a second edition,
00:07:31.360 | if you will, of a Benjamin Graham book,
00:07:33.280 | but in the short run, the market is a voting machine,
00:07:36.880 | but in the long run, it is a weighing machine,
00:07:40.060 | and it's again, the first part of this
00:07:42.100 | is talking about emotion, the second part
00:07:45.460 | is talking about economic growth.
00:07:48.020 | In the long run, and we're all long-term investors,
00:07:50.480 | you have to look at it as a weighing machine,
00:07:53.000 | although you can use how other people are voting
00:07:56.660 | to your benefit, and the way you do that
00:07:59.020 | is simply by what you already heard Christine talk about,
00:08:02.860 | and others talk about up here,
00:08:05.980 | is you need to be diversified,
00:08:09.420 | and you have your diversified portfolio,
00:08:11.220 | you have your investment plan,
00:08:13.460 | as Jim talked about in the first segment,
00:08:15.600 | and what you want to do is just do some rebalancing.
00:08:19.020 | So, if you have a portfolio that happens to be
00:08:22.220 | 40% US stocks, 40% international stocks,
00:08:27.420 | whatever I have up there, whatever that says,
00:08:31.180 | and it gets out of whack because stocks went up,
00:08:34.180 | then you would sell some and come back to your,
00:08:37.300 | looks like 30, whatever that says, bonds,
00:08:40.800 | domestic and foreign, you go back to your original plan.
00:08:44.540 | And then if it goes the other way,
00:08:46.700 | and stocks go down, you do a rebalancing.
00:08:50.300 | Now, then you get back to where you want to be.
00:08:52.220 | This actually adds to your portfolio over time.
00:08:56.220 | So you have a plan, you're investing according to your plan,
00:09:00.140 | you're doing it with discipline,
00:09:02.180 | and you could be doing it through dollar cost averaging,
00:09:04.860 | as Christine talked about,
00:09:05.980 | because you may be putting more money in the market,
00:09:08.020 | so as you're putting more money in the market,
00:09:09.500 | it has dividends pay,
00:09:10.820 | you can use that to do this rebalancing.
00:09:13.580 | And also, if you're retired and you're taking money out,
00:09:16.580 | and it turns out that stocks have gone up,
00:09:18.980 | well, you take it out of the stock side of your portfolio,
00:09:21.940 | and if stocks have gone down,
00:09:23.980 | then you take it out of the bond side.
00:09:25.180 | So you can use distributions,
00:09:28.300 | and you can use new assets going in
00:09:30.380 | to help you do the rebalancing as well.
00:09:32.220 | Taxes are gonna play into this,
00:09:33.580 | and we can talk all about that at another time.
00:09:36.460 | So what you do is you create your plan, as Jim said,
00:09:40.860 | you stick with the plan, and as John Bogle put it,
00:09:44.780 | invest when you can, rebalance, and stay the course.
00:09:49.700 | That works, okay, that works.
00:09:52.580 | Now, I lived through the 1970s, I was in college,
00:09:55.740 | I saw markets like this where interest rates went way up,
00:09:58.900 | and it caused the stock market to go down and all that,
00:10:00.980 | but guess what?
00:10:02.300 | Everything ended up working out just fine.
00:10:04.540 | It took a while,
00:10:05.700 | but we got back to where we were supposed to be.
00:10:07.940 | My personal belief on the market right now
00:10:09.860 | is the problem isn't that the market went down this year,
00:10:13.580 | the problem is it went too darn high last year, okay?
00:10:17.020 | I mean, everything was expensive.
00:10:19.940 | In 2021 was an incredible year because you name it,
00:10:22.980 | it went up in value, stocks, bonds, crypto,
00:10:27.540 | NFTs, real estate, everything went up an awful lot last year
00:10:32.020 | and last year was an ideal year
00:10:33.340 | to be selling some of those stocks
00:10:35.820 | and putting it in other asset classes
00:10:37.460 | like cash or in bonds.
00:10:39.740 | This year might be going back the other way,
00:10:42.060 | I don't know how the year's gonna end up,
00:10:43.900 | but the problem with the market today,
00:10:45.780 | the problem with the fact that the market went down today
00:10:50.220 | actually was 2021, that's where the problem began
00:10:53.660 | because there was so much money sloshing around,
00:10:55.580 | so much of a balloon in asset prices.
00:10:57.340 | Now at the time, again, everybody was euphoric,
00:11:00.380 | it looked great, we love this, let's put more in, right?
00:11:05.380 | You know, you see these kiddies flying through the year
00:11:07.660 | and they're worth $250,000 on your computer,
00:11:10.060 | like, wow, that's great, how do I buy that?
00:11:12.340 | Anyway, so stay the course, come up with a plan,
00:11:16.180 | come up with your asset allocation, stay the course
00:11:19.220 | and don't try to time markets.
00:11:22.060 | (upbeat music)
00:11:24.640 | you