
from Lonier Financial Advisory LLC, Osprey, FL



All time high. And for whatever reason you’re sitting on a lot of cash, maybe you pulled out of the market during the dark days of 2009 (ouch), or have accumulated some savings, an inheritance, or other windfall. Or maybe you have a bunch of scattered investments and cash in money markets that got thrown together in various plans over the years without much rhyme or reason that’s not working very well for you.

And now you’re thinking, the market is hot, maybe it’s time to get back in, buy a bunch of dividend stocks or high-yield bond funds that everyone talks about, or…do something.

Before you jump, take a moment to consider what you’re trying to accomplish. To do otherwise could turn out like a bad weekend in AC. You’ve heard it many times, you can’t time the market. You know that by now, right? It’s a loser’s game, as Charles Ellis and so many others have observed. Investing, on the other hand, is boring, sensible stuff, not like gambling at all.


In the Beginning You Need A Plan

Let’s start at the beginning. Most of us invest to grow our savings over time, so we can fund major goals, like retirement and other large, important goals like college tuition for our kids. What are your goals for investing? Without a long-term plan, it is difficult to achieve these goals. Without a plan you’re leaving your financial future to chance, the roll of the dice. Playing the market, lottery tickets, and trips to AC isn’t going to get it done.

How best to get into the market without getting burned (again)? Especially if you are nearing retirement and can’t afford a series of losses that would cut into your portfolio just as you need it for income?

Make a plan:


  • What are you saving for (your goals)?
  • How much do you need to fund those goals?
  • How much do you need to save each payday to reach those goals?
  • How best to invest that savings to grow over time to fund those goals and keep up with inflation?
  • How will you convert your savings and investments into a secure retirement income stream?
  • How will you manage the plan to stay on track over time?


A good plan won’t put more at risk than you can afford to lose:


  • The strength of your household balance sheet determines how much market risk you can afford to take, as a ratio between secure bonds and risky equities (stocks)
  • If you’re still working, the strength of your balance sheet depends in large part on your future earned income
  • If your income outlook is strong the future value of your income on your balance sheet offsets market risk, allowing a larger allocation to stocks
  • If you are nearing or are in retirement, the strength of your balance sheet depends on the amount of your savings and investment relative to your annual expenses (less SS/pensions)
  • Establish a secure retirement income floor with a cushion before you expose any funds above the floor to the market for upside growth
  • If you have $10 million and only spend $100,000 a year, you can afford to be 100% invested in equities—you’re probably not going to run out of money
  • If you have $750,000 and spend $50,000 year, then you should be very careful about taking any market risk—you’re underfunded, and you could lose the savings you need for essential expenses in a down market
  • For any funds invested for upside growth, diversify away business risk by investing in broad index funds of bonds and domestic and international stocks, allocated according to the strength of your balance sheet



Getting on Plan

OK, you’ve done your homework, learned from the experiences of the past decade, and have drawn up a sound plan as outlined above.

But you’re still in cash or have a scattered bunch of investments and money market funds. How (when) do you get into the market?

Now! You can’t time the market, but you can follow your plan. If it’s a good plan, you’ve already matched the risk you can afford to take with your balance sheet, so you’ll be better off invested according to your plan than staying in cash (exposed to inflation risk) or living with an investment hodgepodge (exposed business and market risk).

There are two ways to get back on plan now:

1). Do it all at once, via lump sum allocation.

Studies have shown lump sum has the highest returns over the long-term, since more of your money goes to work sooner. Historically, the market goes up about two-thirds of the time, favoring the lump sum method.

Think of lump sum as establishing your portfolio at whatever is today’s market valuation. You’ll progress from here, earning the risk-adjusted market returns established in your plan. Whether the market goes up or down from here, you’ll rebalance to harvest gains in either the bond or stock allocations.

2). Dollar cost average (DCA).

Take the lump sum and divide it into four and invest a quarter of it per your new plan each calendar quarter over the next year.

Seems safer, doesn’t it? The behavioral economists say that is our mind tricking us. We fear uncertainty, even in the face of evidence that two/thirds of the time, the market goes up, and a risk-adjusted portfolio invested all at once will have a year’s more return than one that is averaged-in over a year.

You might get lucky. A big drop in 6 months means you’ll buy equities then for less (and bonds for more), and you’ll feel like you made a good decision. On the other hand, the market could jump 10% in the next 6 months, and though you’ll miss most of that jump, you’ll still feel you did the right thing by being cautious and spreading out your entry points. DCA takes away investor’s regret.

If DCA provides the impetus to overcome the fear of uncertainty that allows you to get on plan, then it is a good thing, and by all means, use DCA to get on plan.


The Long Haul

A good plan necessarily stretches over many years. Even if you are 65, 70, 75, your plan should still cover the next 20-30 years. That’s what investing is all about, the long view. Twenty years from now it won’t matter much if you got into an emerging market index at 54, 60, or 66. What matters is the compound annual growth of your whole balanced portfolio over that time period, from whatever the start point of your plan. Without that compounded annual return, twenty years from now, your money will likely only buy half of what it buys today.

The sooner you start, and get on plan, the better. It makes more of a difference if you follow a good plan then if the market is half-full or half-empty when you start.

In the next few posts I’ll discuss what a broadly diversified portfolio designed to give market returns looks like and how it is adjusted to fit household balance sheets.

In the meantime, if you have any questions or comments, please feel free to contact me via phone or email.


–Michael Lonier, RMA℠


Leave a Reply

Your email address will not be published.