PHILADELPHIA REFLECTIONS
Musings of a Philadelphia Physician who has served the community for six decades

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Investing, Philadelphia Style
Land ownership once was the only practical form of savings, until banking matured in the mid-19th century. Philadelphia took an early lead in what is now called investment and still defines a certain style of it.

Health Savings Accounts, Regular, and Lifetime
We explain the distinction between Health Savings Accounts, Flexible Spending Accounts, and Lifetime Health Savings Accounts. Sometimes abbreviated as HSA, FSA, and L-HSA. Congress should make it easier to switch between them. All three are superior to "pay as you go", health insurance now in common use, only slightly modified by Obamacare. It's like term life insurance compared to whole-life. (www.philadelphia-reflections.com/topic/262.htm)

Raising Cash and Investing Cash

Since all investments are eventually sold, else what's the point of investing. It seems to be universal practice among professional investment advisors to liquidate stock immediately, once a decision is made to spend (substantially) from the investment fund. Having been on a number of investment committees, I noticed the decision to build a new building or buy a big piece of equipment brings the investment manager immediately out of his normally silent attendance. When the general cost is announced, he immediately will announce that he is liquidating that amount, and setting it aside. Since large capital expenditures are often finally spent a year or two later, it means losing appreciable income to do that. So I asked, and sure enough, it is a firm policy. The reasons given have a strong tinge of self-interest in them, so I was never quite sure. The stock market might well go up during the interval between decision and payment, but if it goes down enough to thwart the plan, the investment manager may feel he could get the blame for ruining a good business idea. So he prefers to play it safe. What he fears, may sometimes happen, but probably not regularly. This sort of behavior is universally applauded as sound business practice. A company is supposed to know its business, and ordinarily plans to make more money from its business than from its piggy-bank.

Where policy dispute exists, it is on the opposite sort of decision, whether to invest a windfall all at once or drag it out. Of course, if the amount of cash is truly substantial, there is a risk the purchase will itself raise the price of the stock being bought, but if that's a likelihood it probably only affects very big investors, or very small businesses. Big shots don't need or welcome outside comments. For ordinary folks most likely, the concern is that the market will constantly fluctuate, and cause you to spend your windfall (or inheritance, or gift) at the time of a bump up. If you spread it around at least you get the average price during the interval. There's at least one consideration to the contrary, however. Roughly speaking, ninety percent of the gains, take place in 10% of the time interval. If you spread your investments out, you will likely miss out on most of the gains. You may think you can time the purchases adroitly, but it is almost universally agreed that market-timing is futile, and nobody can consistently win by trying it. Most young people disregard that advice, and therefore encounter the truth of a second maxim. The best thing that can happen to you is to lose some money when you are young.

The matter has been thoroughly studied, and leads to general agreement: it is true at all times and seasons, with perhaps a weak tendency for the market to go up a little at the end of the year. Robert J. Schiller and Jeff Sommer each had articles in the August 17, 2014 New York Times of studying all the one-week periods since 1926, when modern record-keeping began. It was possible to lose a significant amount of money by investing in the year before the major stock market crashes of 1929, 1999 and 2007, but even in these extreme pre-crash situations the markets recovered the losses in 2-3.5 years. Otherwise, lump-sum investing beats dollar-cost averaging by about 4%. Accompanied of course by the usual advice that past performance is no guarantee of future performance.

In fact, the two styles have a lot in common. The human fact of the matter is that selling a business, or getting an inheritance is a relatively rare occasion in life. When cash accumulates suddenly, it is best to hold your nose, diversify widely, and plunge ahead. When you think about it, dollar-cost averaging is really much the same, except you get much smaller amounts once a month in a paycheck -- but then invest them immediately. The true advantage arises, not in how quickly you do it, but just in making a decision to buy a diversified index fund. Dollar-cost averaging -- Investing a fixed amount regularly -- is pretty much the same, except more frequent. When you make those two decisions and go to sleep on them, you will one day wake up and discover you have accumulated much more money than you expected. That only leaves the occasional windfall investment, which comes along every fifteen years or so. Unless you are dreadfully unlucky, the time to hold off investing has a pretty small chance of coinciding with the windfalls of life. Only if you feel you will develop a pressing need to raise cash in the next three or four years, should you hesitate.

Remember, there is only one reason to hold cash or bonds that everyone agrees to. Whether it is to meet a payroll or to time the markets, you want at all costs to avoid the situation of being forced to sell temporarily depressed stocks, at a loss. If there is any significant chance of that during the next few years, you had better assemble the cash on hand, right now. If you haven't had this degree of prudence in the past, receiving any windfall cash infusion is a good time to put it aside.

And finally, as far as selling is concerned, sell your losers and hold on to your winners, for tax reasons. To thwart the habit of bad news creeping up on you gradually, like the frog getting boiled in the pan, check your winners and losers every October. If you have accumulated three thousand dollars of losses, and three thousand dollars worth of winners, sell them both. Two months later, buy back six thousand dollars worth of the winners. This will probably generate a little profit bump from the "end of the year effect", gets rid of your losers, strengthens your portfolio, and reminds you to look at your results, once in a while.

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