Jared's question is up next. It says, "I know the Money Guy advises against trying to time the market, but how do you feel about making adjustments based on larger trends, like dollar-cost averaging less into sectors we anticipate will decline? Dollar-cost averaging less into sectors we think. That's more of an asset allocation question. It's a good differentiator. I think a lot of people ask this question. I think this is good, so I want to think through what would be a great way to answer this because I do think part of it depends on where you are in your financial journey, Jared. This is what I mean by that. When you're early on in your wealth-building stage, and you're just starting out and you're maxing out your Roth and you're following the
Financial Order of Operations through the nine tried and true steps and you're trying to build up, I don't think that you're ready to spend a ton of time thinking about your asset allocation or spend a ton of time thinking about which sectors are undervalued and overvalued. What you really ought to focus on is the single most important part of your wealth-building journey, which is your savings rate. You ought to be focusing on that. Want to know what to do with your next dollar? You need this free download:
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Now, if you're someone who is further along in your wealth-building journey, your portfolio has reached that critical mass. I don't think there's anything wrong with moving from a generalized solution like a Target Retirement Index Fund to a more specialized solution where you have a portfolio that you've designed or someone has helped you design that fits your unique risk tolerance, risk capacity, goals, time horizon, savings rate, and all those sorts of things. But this is what I think you have to be careful of, and I think people are amazed to hear this. If you are a 40-year-old with a million bucks and you work through to the appropriate portfolio based on your time horizon, risk tolerance, risk capacity, all these things, and it's determined that this portfolio is the one you should have, I'm going to use 60/40, you should have a 60/40 portfolio. Just because the market shifts or just because something moves inside sectors that you find interesting probably doesn't mean that the allocation that's intact for you is no longer the appropriate and correct allocation.
So, I get real nervous when people talk about moving into sectors and out of sectors because there's a difference between tweaking around the portfolio, rebalancing edges, and actually trying to time the market. I think that's a dangerous game that people play, and they lose sight of. I was because I think you did a good job of talking about the different asset classes. One of the things that I felt Jared was nibbling on a little bit was that we just did a show on dollar-cost averaging versus lump sum, and I noticed a lot of people in the comments were like, "Yeah, but sometimes it can pay to time the market."
I did want to clarify because we kind of shared our new Money Guy rule is that if this is a large portion of your net worth and it's life-changing, so think about if you sold land, a business, or had an inheritance come your way, and it was such a large amount, then you probably do want to dollar-cost average over, say, five months and then extend that out depending on the size of it. But I would tell you we do have, and it's just that we can only cover so much, guys. I think there's nothing wrong with having what I call Dynamic dollar-cost averaging. I worked on a concept with Fritz over Retirement Manifesto during the last downturn, and we've even implemented this with a lot of clients. When you have a dollar-cost averaging over ten months, say it's a million dollars over ten months, but then you go into bear market status where the market loses 20%, I don't have a problem because it's driven by the historical data that if it's over a 20% loss, you want to accelerate a month earlier in your dollar-cost averaging. That's okay. And then every 5% additional loss, if you want to bring another month forward in your dollar-cost averaging, that stuff works.
But I get nervous about talking about that on content because if you don't have the discipline to understand what I'm talking about, then it could go horribly. You've taken rules that are rigid and added some gradations to it. But I still think it's worth noting because I know there's a lot of financial mutants, and I want you guys to know what we think about and what we do for clients and all the things that so you can train your mindset to become even better with how you manage your money. I don't know if that's completely because Jared went a lot of ways. He talked about dollar-cost averaging; he talked about sectors. We kind of gave him an all-you-can-eat buffet, and hopefully, we got him an answer that. Look, there's tons of comments pouring in about, "Yeah, but in March of 2020, you really should have loaded up." And that's not incorrect. We're talking about macro-micro, macro-micro. What you're talking about was macro, too. "Hey, the market's down greater than, so I'm going to..." There's nothing wrong with still buying those low-cost index funds, allocating across the equity spectrum. That's a different conversation. Saying, "Oh, the market's down, there's an opportunity. I'm going to save a little more, I'm going to put a little more into my dollar-cost averaging strategy." Those, in my mind, are not the same, and you need to be careful that you don't fall into that timing position where you're trying to get out and then get back in. That's scary stuff. For more information, check out our
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