Take Chips off the Table?
Photo by Heather Gill on Unsplash
If you've been following the market or economy much at all the past decade, you've probably noticed that things have been pretty dang good for the most part. The U.S. stock market over the past ten years has produced an average total return of nearly 16% per year! I mean I'm no math whiz but since the long-term average annual return has been 10%... wowza, that's some nice math. The long and short is that the stock market has been giving more incredible returns than expected, and for longer than expected.
That's obviously really good for our portfolios, but naturally, when things are good, we tend to want to protect those gains. In fact, I've heard some version of the following question asked many times recently:
Is it time to take some chips off the table?
Now if you're referring to chips dipped in something delicious like guacamole or salsa verde, then yes, I highly recommend taking some chips off the table and putting them in your mouth. But if you're referring to your proverbial chips of investments? That's a different question altogether.
First, an aside
First of all, please do indulge me by allowing me to take a cheap shot at the vocabulary.
The idea of "taking chips off the table" is obviously referring to gambling; that when you're up due to a good run, then you cash out a portion of your chips.
The problem with that vocabulary is that I think it's based on a poor analogy. When we invest in the stock market, in companies that make real things and have real earnings, I don't think of that as gambling. Gambling is primarily based on luck. Investing is primarily based on the historically sound principle that the economy, over long periods of time, will continue to grow. And investing our money in the companies that make up that economy will lead to reasonable returns over time.
I'm not interested in gambling my money or the money of our clients; I'm interested in investing that money in a way that leads to being able to accomplish our life goals and to support ourselves to and through retirement.
Okay, now that I have that off my chest, let's continue.
Lock in the gains?
The question comes down to this: Shouldn't we lock in these gains while we can?!?
I can see the logic of that. But the question is operating under the assumption that the market is about to decline, which of course we don't know, and we've been wrong about many times before. On the other hand, there's also good reason to think that a downturn of sorts could be coming our way or is already upon us (this could be a small blip, or a major bear market, or anything in between, and of course we have no idea when it might occur).
But if history has shown us one thing, it is that no one knows the future, and therefore it can be dangerous to try to take action based on what we think might happen.
Timing and uncertainty
The old phrase still rings true: "time in the market beats timing the market".
As a reminder, timing the market requires timing it right twice, when you sell and then again when you buy back in. I don't know about you, but that sounds like an incredible amount of guessing in a world where we can't know anything for sure.
Investing legend Peter Lynch once said: "Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in the corrections themselves."
That really gets you thinking.
Here's another helpful way to look at it.
Author Carl Richards uses the phrase "irreducible uncertainty" to describe the reality that we can plan, analyze, and gather information all we want, but there is an undeniable fact that we cannot know what will happen in life and the markets with any form of accuracy. So rather than trying to time the uncertainty and play the odds of the market, I suggest accepting the uncertainty and instead:
Building a balanced portfolio, spreading out the risk and reward into various areas.
Building our plans in spite of the uncertainty. Putting together an investment policy before the tough times, outlining our goals and priorities and of course our asset allocation percentages, so that when things go crazy (up or down), we have a strategy in place and there's no need to make rash decisions.
Regularly checking our asset allocation and if a portfolio needs correcting (whether because of the markets or because life circumstances have changed), then we should adjust our allocation by rebalancing.
When to make changes
So in the end, I'd suggest the better question to be asking is "Do you need to take chips off the table?" Let's not take chips off the table because of the uncertainty of the markets, but rather if something has changed in your life.
I think this can be broken down into three primary components:
Portfolio changes: If your asset allocation has drifted wildly from your target asset allocation due to the rise of the market, then yes, it's time to take action. For example, if your target is 60% stocks and 40% bonds/cash, but you're currently at 80/20, then your portfolio is too risky for your situation and you should indeed sell some stocks to bring your portfolio back to 60/40.
Life changes: Maybe your goals have shifted, perhaps you received an inheritance, or lost a job, or you're ready to retire, etc. In other words, something has changed such that your target asset allocation is no longer appropriate for your life situation.
Upcoming changes: Maybe a need has arisen where you'll need a big chunk of money in the short-to-medium term. Perhaps you're going to purchase a house, or will be starting a business, or something else that will require a lot of cash. In that case, you should absolutely sell some assets in order to raise the cash for that need. You don't want that cash sitting in the market, as the market can do unpredictable things in the short-term.
Otherwise? I'd suggest that it's best to resist the temptation to make changes. Keep those (poor analogy) chips on the (poor analogy) table. And stay the course my friends.