You Should have a 5 or 10 Year Investment Horizon – Really!

I am still hearing financial gurus telling everyone that they should take a 5 or 10 year time horizon when investing in stocks. This bears no relationship to what happens in the markets. It’s nonsense.

Taking any sort of fixed period as a basis for investing that takes no account of how that investment will perform over time is gambling, unless backed up with an exit strategy if the investment doesn’t work out.10 Years of the Dow Jones Industrial Average

The gurus will tell you to stick to your plan. I agree with sticking to your plan. But that plan should include  contingencies in case the investments take a nose-dive, like now.

An exit strategy can be part of the plan can’t it?

Take a look at the Dow 10 year chart on the right.

In 1999 your financial planner tells you to invest your nest egg with him and FORGET about it for five years. He is trying to stop you panicking at some point in the five years if things don’t work out. This is for their benefit – not yours. It’s all about fees.

You watch the DOW drop from 12,000 to 7,500 over four years. If that is not like a water torture I don’t know what is. That’s why they don’t want you to look at your investments.

You rationalise you invested at the wrong time and were just unlucky. Don’t gamblers talk about being lucky or unlucky?

They told you market timing doesn’t work. So they just put your nest egg money into the markets at the top of a bull market and gambled on it continuing to go up further, but it did not.

By 2005 they have had your money for the 5 years as agreed and so now what do you do?

The DOW has recovered to 10,000. Your financial planner tells you your nest egg is still under water so you need to extend the 5 years for another 5 years. Anyway 10 years is  a much better time-frame for long term investing. They are sure the market will recover and grow your nest egg in that time.

You rationalise again that the market is returning and so it is silly to sell out at a loss now. You stay in and watch your nest egg recover and grow just as your financial planner promised.

Even after losing 40% of your nest egg in 2003 the strategy of buy and hold was not modified to include some form of stop loss or other exit strategy. Is there no lesson to be learned here?

There is a little blip in early 2007 where the market retraces back to 12,000 and your heart is in your mouth once again. But it proves to be a buying opportunity and the market makes new highs. That’s a bullish sign the markets will go higher. All is well in the land of buy and hold.

It’s 2008 and only one more year to go for your 10 years of blind faith in your planner. In late 2007 the market wobbles several times. Your financial planner is saying “STICK TO THE PLAN” and “TRUST ME”, we have sophisticated modelling that tells us not to be concerned.

Most of 2008 is full of sleepless nights, and arguments between you and your spouse about what to do as you watch the market tumble and your nest egg disappear. But you still believe in your financial planner and don’t know what else to do anyway. They keep saying DON’T PANIC” when in fact you should be panicking.

To my mind Nature gave us panic to make us take action. The word has been hijacked to make you a coward if you redeem your nest egg money.

No one should be investing for any period of time in the stock market unless market conditions are right. That means stocks need to be going up – refer Al Thomas’ book “If It Doesn’t Go Up, Don’t Buy It!

It’s 2009 and now you can thank your financial planner for a 10 year roller-coaster ride to zero returns and large losses to your nest egg. It may not all be their fault though, they are trained to lose your money.

It is NOT investing if you do not protect yourself against the market  downside and large losses.

Investing without an exit strategy for 5 years or 10 years can be a recipe for disaster if you do not time it properly.

Investing is a continuum in that you invest in stocks until the market moves against your stops or other exit strategy. Then you sit on the side-line and wait until the market invites you back in with favourable investment conditions and a high probability of the market rising.

If you enter the market and it decides to move against your positions then you get out. The market is telling you something – listen. It’s not a matter of being in for 5 years or 10 years regardless of what the market does. That is irrational.

If it doesn’t sound right – it is most likely not right. Trust your instincts again. Don’t you be irrational – starting today.

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