I hope my friend listened to me about NOT TIMING THE DAMN MARKET

Ramit Sethi · June 13th, 2007

Last week, I talked to a friend of mine who’s starting to get interested in investing. He’s a bit unusual in that he has $80,000 sitting around in a savings account earning 0.5% interest (here’s a referral to the better savings account I use)l) and has some slightly wacky ideas about investing. For example:

  • “I don’t plan to invest in my 401(k)…I always thought that’s for people who just want to get rich over 50 years, like old-style investing.”

  • “I want to buy stocks. I know technology, so I really want to buy tech stocks.”

To this I replied, “Really? Which stocks?” He said, “Netflix–I think it’s going way up.”

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If you’re a huge dork and read daily investment recommendations for fun, you’ll know why this is significant: Netflix shares jumped 20% last week on rumors of a buyout from

Now, the fun part.

Previously, I wrote about market timing and why it is incredibly stupid. As you can imagine, I spent a lot of the conversation screaming at him, telling him not to buy individual stocks at first, get educated by just reading some good books for a month, and trying to correct interesting (“CRAZY”) ideas about getting rich. Fortunately for me, I just found something that made me prance with glee. Yeah, I said it.

Subject of email I sent to him: See what happens if you try to time the market?

“Rumors of a buyout deal with online retail giant pumped up Netflix’s shares last week. The stock nearly reached the $26 mark last Wednesday — its highest level in six months and up more than 20% in two days.

This week, the shares have given up that premium. Shares of Los Gatos, Calif.-based Netflix (NFLX, Trade ) dropped under the $20 mark Wednesday, hitting their lowest price since August of last year. Over the past three days, the stock has lost more than 18% as analysts from J.P. Morgan and Citigroup have downgraded the shares on concern about fresh competition from Blockbuster Inc.”

Don’t try to time the market!!!

That is from a news release today by Dan Gallagher, which leaves me wiping my hands in complete and utter satisfaction. PLEASE READ FOR AT LEAST 20 MINUTES BEFORE YOU GO INVESTING ALL YOUR MONEY IN SOMETHING. AJKSNFKANKGNASGJK

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  1. Danielle

    I’ve worked for a financial services company for the last 6 months. While I don’t pretend to know much about investing or finances, I have learned leaps and bounds from where I was in January.

    And you’re 150% right about not trying to time the market. At a company presentation for Q1 end, they talked about how those who missed the best x amount of days in the last year actually earned significantly less than those who invested in the long haul. I will try to find the numbers for you if you want to throw them at your friend.

    (Sidenote: I just came across your blog from Ryan Healy & Employee Evolution. My goal tonight is to come up with my budget — which my mother has been yelling at me about for about 5 years…)

  2. I use to work with someone that sounds very similar to this guy with extreme personal finance views. He was very adamant that the 401K had all very poor funds and he could do better elsewhere. The funds were all between 3 and 5 star ratings on Morningstar, they were fine. I worked with another guy that would practically day trade the funds in his 401K possibly squeaking out another percentage or two, but probably losing a few percentages long term. People get attitudes and perceptions on finance from numerous different sources (media, parents, friends, etc)that can be very difficult to break.

  3. “I think it’s going way up.”

    I think it should be empathized that this is a ridiculous statement to make if you know nothing about a company besides what it does.

    Remember kiddies: stock price means little in-and-of itself.

    I do invest in individual stocks, but thankfully my schooling has given me the training to read balance sheets, understand and interpret NI43-101s and NI51-101s, and to make cash flow projections. Plus, I hate golf, and I prefer to play sports rather than watch them, so what else do I have to talk about around the water cooler if not stocks?

    Two good pieces of advice from a coworker who has been through it all (including tossing two different sets of keys to houses to the bank when the economy tanked):

    “It takes money to learn anything, be it sky diving, golf or investing. If you lose a little at first, hopefully you learned something.”


    “There are two schools of though on investing in your particular field of knowledge. One is do it, as it is what you know best, and the other is don’t, as if there is a downturn you will likely be out of work and broke. Keep this in mind.”

  4. Marie Cannizzaro

    I learned this lesson early on when my dad tried to teach me about investing at like age 8. I reaaaally wanted to invest in TCBY yogurt because I saw something in the news about how it was a good buy. But sure enough, my dad pointed out the next week that the stock had plummeted like a scoop of vanilla on hot sumer day.

    Can’t wait to see the site update!


  5. 0.5.% interest? One half of one percent interest? What bank is this?

  6. Ramit Sethi

    Any major bank, like Wells Fargo or Bank of America.

  7. A Tentative Personal Finance Blog

    Any major brick and mortar bank is going to give you a low percentage rate for your savings or checking account.

    As for your friend, keep educating him. Tell him about an investment that you can get a 50% return right away without doing anything except participating…. oooohhh the magical investment…. 401(k) and company matches.

    If he won’t listen, beat him senseless.

  8. TheFinn

    The widely-cited study on missing the best x trading days resulting in highly diminished returns Danielle is likely referring to can be found here:

  9. Isn’t your assumption that Netflix is overpriced just you trying to time the market? If you really beleive that market timing is irrelevant, you wouldn’t care if you bought Netflix after a 125% run or a 125% selloff.

    Investing is mostly about choosing the right asset allocation, but timing is somewhat important. There is such a thing as bad market timing, such as an investor that always sells during a panic. On the other side of things, there are also good times to buy as stock. In the Netflix example, if you were considering buying Netflix after the 20% gain, you might say to yourself “I’ll wait and see if the Amazon deal goes through. If it doesn’t the stock will probably drop and I can buy it for cheaper”. You don’t need to make any predictions about the Amazon deal to follow this strategy, but NOT buying because of market conditions is still timing the market.

  10. Warren

    People who don’t invest in their 401Ks confuse me greatly. It’s a instant, guaranteed return via the employer matching. It’s free money and you’re just going to leave it on the table? *boggle*

  11. Christine

    I have fallen in love with your blog ever since I first discovered it a couple of months ago; I’ve been reading it religously ever since.

    As a young woman and recent college grad with ridicoulous student loans and credit card debt, I vowed to make being financially healthy my #1 goal. This blog is helping me acheive this goal. I only wish more woman would take control of their finances too.


  12. Brian at

    Peter Lynch said (in One Up on Wall Street,
    “Before buying a stock, I like to be able to give a two-minute monologue that covers the reasons I’m interested in it, what has to happen for the company to succeed, and the pitfalls that stand in its path.”

    Seems like pretty good advice to me.

    More here (disclosure: I write for TMF):

  13. 401k’s are only as good as the match and vesting terms. If you want to invest and look away, invest in the indexes not mutual funds.

    I would be curious to see Ramit on and how his portfolio changes over time…

  14. RE Agent in CT » Time

    […] Rambi Sethi I hope my friend listened to me about not timing the damn market […]

  15. ChristianPF

    When I think about market timing, I think about how it is just about the opposite of anything Warren Buffet would do. He just buys when he sees a good deal and holds on to it for decades. It’s low stress and high reward.


    I try to time the market, but my timeframe is in the decades range.

  17. Jonathan

    Other than the fact that they use the internet and dvds, I don’t really see how Netflix is a “tech” stock.

  18. Danielle

    Actually Finn, I was refering to data I saw from Ernst&Young that ran data for 10 years, ending Sept. 30, 2006.

    Annualized returns for each of the following:
    Fully invested: 8.6%
    Missed 10 best day: 3.6%
    Missed 20 best days: -0.2%
    Missed 30 best days: -3.5%

    (Source: Bloomberg Data collected through 9/30/06)

    But thanks for report anyways!

  19. Grodge

    This chap needs a primer on PERSONAL FINANCE before he even thinks about investing in individual stocks. Life insurance, emergency fund, 401(k), IRA, paying off debt are all things that come way before buying Netflix stock.

    Just the pre-tax status of a 401(k), with or without a match, is reason enough to max it out. If he can’t understand that simple concept, then forget talking to him. Any advice you give him will be either ignored, or worse, misinterpreted and you may eventually be blamed for his financial bungling.