Why you should be greedy when others are fearful
The investment advising community owes a lot to William Bengen, but his statements about when to be in the market require a deeper look. / Courtesy of Flickr user jollyUK
COMMENTARY This month, the Journal of Financial Planning had an interview with William Bengen, the man whose research is behind the famous (in my profession, anyway) 4 percent withdrawal rule for retirement. While I'm certainly appreciative of his research and subscribe to his thoughts behind a prudent withdrawal rate, he missed the mark regarding how advisors should be helping their clients invest in the volatile market.
First, it's important to understand that Bengen is a very smart man. He graduated from MIT. His research on safe withdrawal rates in retirement has been the gold standard on the topic for two decades.
However, his interview was pretty revealing when it came to how advisors should be handling client assets. Bengen was asked about using dynamic withdrawal policies in the face of extreme market volatility. (Remember, we don't have to travel too far back to reach a time where swings of several hundred points were a rarity, rather than the rule.) His answer: "I think that they need to find a money manager who is willing to do something other than buy and hold. I'll be quite frank about it. Buy and hold in these environments is an invitation to disaster."
In a way, I agree with him. Buy and hold isn't a good strategy. The proper strategy is buy, hold, rebalance and tax manage.
Simply buying and holding investments means your allocations will likely drift away from your targets, giving your portfolio a much different makeup and risk profile than you originally intended. You have to rebalance back to your original allocations. You must also be vigilant about managing your portfolio for taxes. You may have losses you can book in the middle of the year that might not be there at year-end, thus losing the opportunity to have Uncle Sam share in part of the pain of losses.
However, my assumption is that he actually meant to engage in market timing, especially with his words following the above statement: "You need a money manager who is willing to withdraw your funds from the market when there is high risk present -- and I believe the risk is very high now -- and be willing to then further invest you when values improve and the risk is reduced."
This actually flies in the face of when you would want to be in the market. While it's difficult to stay in the market when risks are high, that's when expected returns are high. It's easy to stay in the market when risks seem low, but that means you buy when expected returns are low and sell when expected returns are high, which doesn't make sense.
My profession owes a lot to Bengen for his work on retirement withdrawal rates. Honestly, all prudent investors do as well. But I'd still prefer the advice of Warren Buffett, who said investors "should try to be fearful when others are greedy and greedy only when others are fearful."
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