Do You Know When to Move to the Sidelines?

In 2001, our investments got smashed when the dotcom bubble burst. But we didn’t panic. We were thirty-something, with another 30 years before retirement, so we listened to our advisors who said not to worry, that the market always comes back.

contemplating financial future

In 2008, we got smashed again and were down by almost half. Feeling like a whack-a-mole, we started to worry. We needed to save for retirement, but if these kinds of setbacks continued, we’d be living out of a cardboard box by the time we were 70.

When you flip off your mountain bike, fracture both arms, slice your leg and take six weeks off work to recover, are you making forward progress? Not so much, because you stopped work to stay home, binge-watching Lost, waiting for your body to heal. Your accident was a setback, costing six weeks of productive time that otherwise would have been spent working toward your primary goals.

When you get back to work, you’re behind and have to hustle harder to catch up. You may or may not succeed, because while you were out, others might have stepped in to pick up opportunities you left on the floor. Wouldn’t it have been better if you hadn’t gotten behind in the first place?

The same principle holds true for your investment accounts.

The high cost of losing time to recovery.

If you had invested in 1000 shares of SPY on October 1, 2007, it would have taken you five years and five months from that point forward to make 1.2% or $1920 on your investment, thanks to the effect market crash and recovery.

During this time, you would have seen your account value decrease more than 50%, from a high of $154,650 to a low of $73,930. That’s a whole lot of heartache to sit through, not to mention lost time. When your advisor says “the market always comes back”, that’s what he’s talking about.

But what if you had a proactive money manager looking after your funds? Someone who was looking for the oncoming downtrends and could move your money to cash to minimize loss?

Let’s say you had a diversified stock portfolio worth $154,650, but with an active manager in charge. After years of trending up, the market takes a downturn. Convinced it will continue, he sells your positions at $139,185 for a 10% loss and moves you to cash.

Loss wastes time and resources.

Though young people have the time to make and perhaps recover from mistakes, as you’ve seen, blunders can be costly, and you may never recover. Older people simply don’t have time for these mistakes. The key is to not to stumble in the first place.

And it’s not just a problem for individual investors. It’s a problem for pension funds as well, who generally invest with a buy-and-hold mentality.

Since 2000, many of them pretty much wasted the last 17 years going up and down and up and down, then up again, such that the total return over that period, because of two crashes, wasn’t good. Moving to the sidelines at some point during each crash would have protected assets sufficiently to achieve fantastic returns.

The stock market has been rising since 2009, with many minor drawdowns along the way. A big drawdown in the near future is a distinct possibility, given the market’s regular history of serious decline: 1973, 1980 1987, 2000, 2008, etc.

A combination of shaky, economic fundamentals, overvaluations of stock compared to historical norms and millions of boomers turning 70.5, who will now be required by IRS regulation to sell chunks of their portfolios—all adds up to a market ripe for a potentially nasty correction. Now more than ever, people need to be vigilant with their investments.

What about the management fees?

Yes, fees are a factor and can eat away at your savings. But if your robo-advisor sets you up to ride the market for the low, low price of 0.30% of assets under management, after 10+ years, sure, you didn’t pay all that much to lose $249.

But if you hired a good money manager who knows when to move to the sidelines, yes, you’re going to pay higher fees.

When you pay for active management, you are hiring someone to watch the many factors that influence investment values. A professional money manager may be able to prevent most of what otherwise would have been a 50% loss in your account value better than you can. They may not capture the very top or the very bottom of a market turn, but they can see and respond to the trend in motion, which most retail investors struggle to recognize.

Good money managers are in the markets every day, all day. They see the clues, take action, and seek to preempt disaster through vigilance. That’s the value they bring.

Do you know when to move to the sidelines? Does your advisor? Will your advisor move you to the sidelines ahead of the next big downturn?

You should ask.


About Diane Cohn

Diane Cohn is a seasoned marketing professional with a background in real estate, finance and tech. When not geeking out on digital strategies for driving traffic, you'll find her on YouTube feeding her creator addiction.