Home » Investing, Retirement

Should You Really Ignore Price When Investing? Is Passive Investing Bad?

13 October 2009 No Comment

I recently wrote an article over at Moolanomy.com entitled Market Timing vs Market Awareness. My basic argument was that you don’t have to time the market but that you should definitely be aware of what the market is doing and make adjustments to your buying behavior, even if the adjustments are small.

As I thought more about this concept, I think it’s a very interesting discussion. So many advisors or experts recommend strict passive investing. They say you don’t know anything so you should passively invest the same amount of money at regular intervals over the long term. You should do this no matter what the market is doing. So, is this a good strategy?

Personally, I think it’s stupid to ignore price, to ignore the market, and invest passively. If we’re in the middle of an asset bubble, shouldn’t you alter your buying? Maybe slow it down even just a little? Most people would argue that it is impossible to know if you’re in a bubble or not until after the bubble pops. While its much more obvious afterwards, there are ways to identify an over-heated market.

For example, in 2009, we’ve run up 50% in 6 months. I’d say you should be cautious in continuing to buy stocks blindly at these levels. I’m not saying you should sell everything and go short, but maybe halt your buying?

What about a long term bull market?

Now, if we officially started a long term bull market, then you should definitely keep buying, even when the market is up 50%. This is where you have to pay more attention to macro economic fundamentals and conditions. Personally, I don’t think we’re entering a long term bull. I think the U.S. economy will struggle for years, there’s just too many structural issues with it. This doesn’t mean you shouldn’t buy stocks, but you should be more selective and even more aware of entry points; the opposite of passive investing.

So, what’s my point?

My point is that if you are determined to continue buying stocks over the long haul (we’re talking 30-40 years) and build up a nice portfolio, then there might be a better approach than simply blindly investing at regular intervals as you move towards you goal. Your goal isn’t a bad goal (historically, it’s worked) as long as you’re looking at a VERY long term perspective.

Continue to put money into the account at regular intervals, but when the market has enjoyed a huge run up, let the cash build up rather than move it into stocks each month. Then, if the market tanks as it did in early 2009 and late 2008, put all that cash into play. Remember, you’re doing a long term approach here so you should LOVE market crashes and downturns. These are the moments when you should deploy your cash.

If stocks are range bound or moving up slowly over time, then I wouldn’t worry about halting your buying. But if the market spikes or moves up really fast (see Nasdaq circa 1999), then maybe you should let the cash accumulate.

One of the commenters on my Moolanomy article makes a great point that investors should invest rationally and taking price into account is very rational!

Comments are closed.