Why Waiting for a Pullback is Not the Right Investing Strategy
This blog post was originally published in Don Connelly’s blog on the FA Magazine website.
According to a preponderance of clients, the stock market is overbought. They’re going to invest, but not until the pullback takes place. What’s an advisor to do?
First, it’s not “the” pullback we’re talking about. It’s “a” pullback.
The market always pulls back. Time doesn’t cause a pullback. Events cause pullbacks and there is no shortage of events to report on.
When does a client decide enough is enough? “I can’t spend my life waiting for the next pullback. I’ve got to get started sometime.” In the movie Summer Catch, one of the characters said that the Indian rain dance always worked because the Indians danced until it rained. We can call this the client pullback dance.
A lot of clients will prevail and wait, because not all advisors are confident about the market. Simply put, we are generally more concerned about losing money than we are about trying to make money for our clients.
Let’s assume your client prevails and he or she waits for the pullback.
In my career, I’ve never recognized a pullback until it was over. Neither has your client. The market will pull back, he won’t act and then he’ll be waiting for another pullback. Long-term investors ignore pullbacks.