The time value of investing

Friday February 8, 2013

Telly Halkias

Legendary English economist John Maynard Keynes once reflected on the financial relationship between one’s present and future: "The social object of skilled investment should be to defeat the dark forces of time and ignorance which envelop our future."

Perhaps Keynes had a crystal ball into human impulses -- particularly in light of the current economy, the behavior of markets, and what it means to everyday citizens.

Recently, despite its dizzying heights, the Dow Jones Industrial Average took a sudden daily dip. I was on the phone with my CPA discussing some tax issues. Then his other line rang and he excused himself before returning.

"I keep getting called on the same subject," he said, sounding exasperated. "Someone just asked me if they should sell their stock market holdings and where I’d recommend they invest."

"If they sell, they might as well put the money in a mattress," he said.

My accountant preached patience to his clients for good reason: He was following the proven principles of the time value of money, as well as demonstrating some historical insight into American market investments.

It’s important to distinguish between the individual and business shareholder; each operates under a different set of assumptions. The former seeks one thing, security. Getting there is a process that requires strategy and psychology.

Putting money into a mutual fund or tax-deferred account and buying individual stocks isn’t the same thing, even though the promise of yield over time remains similar. Risk increases with a single source investment, and decreases with diversity.

Mutual funds, diverse by design, are centrally managed portfolios whose dispositions are in the hands of professionals. A conservative fund should mirror general market trends. Since the market has never experienced a single 10-year loss in its history, despite depression and recessions, it’s highly unlikely to happen now.

Free markets, without the intervention of dubious bailouts, willultimately correct themselves through the laws of supply and demand.

Of course, that sounds sterile in light of the human story behind each investment, but it’s not meant to. Can exchanges stand stringent regulatory review on a more frequent basis? Absolutely.

But such controls are already in place. When we review the decreased net asset value of our holdings, we’re victims not of the law, to echo Plato, but of men. These people in the private and public sector -- the latter from both parties -- were asleep at the wheel, and remain groggy to this day. There’s nothing inherently wrong with the bus, just the folks who’ve been driving and maintaining it.

This is essentially what my accountant was getting at. For an ordinary citizen to pull mutual funds out of the market, whether for a dip or a recession, would be anathema. It’s a natural reaction to look at that monthly statement, only to see 50 percent of their value gone, and cringe.

Yet whatever the numbers, they are not a realized loss, with all of their added taxes to boot, until the holder sells. Let’s say that again: There’s no loss until the holder sells. That’s the bottom line. Getting out not only misses the inevitable recovery, but also the geometric progression in growth of any recurring outlay made during the bear market.

So "investment" is a term that is widely used, but often misused. By definition, the word suggests a long look at, and belief in, the future. On the other hand, those who tout "short-term investments" may indeed make some quick cash. They may also lose much in rapid fashion. For middle class Americans, it has another name: gambling.

Yes, this view is reduced to its basest form in order to address a certain segment of the investing public. Retired citizens and others who currently rely on those monthly checks and see years of hard work vanish might not have a decade to wait out the market or to see if stimulus legislation will bear fruit or lay eggs.

For them, the decision to pull out is personal, sensitive, and rife with urgency.

But for that sector of the working population that continues to grind its way through careers, budgets, parenthood, and the challenges that make up life, giving way to impulse as a decision making tool can spell further financial disaster in letting dark forces envelop our future.

Telly Halkias is an award-winning freelance journalist. E-mail him at:


If you'd like to leave a comment (or a tip or a question) about this story with the editors, please email us. We also welcome letters to the editor for publication; you can do that by filling out our letters form and submitting it to the newsroom.

Powered by Creative Circle Media Solutions