One of my investing pet peeves is the phrase “take some money off the table.” Perhaps the reason why is the blatant reference to gambling. At a casino in Las Vegas, it wouldn't be unusual for a gambler who has had a recent streak of luck to “take some money off the table” and just play with “house money.” If he takes off what he brought to the table, his worst-case scenario is going home without any losses. Not a bad outcome in a place where the odds are always against you.
The reason I don't like it when it is used with investing is that smart investing really isn't gambling. Not only are the odds stacked in your favor, but the secret to investing intelligently is to make as few trips through the “Wall Street Casino” as possible. Ideally, it's one round trip for each dollar. You might contribute this hypothetical dollar into a 401(k) at age 35, invest it in a hypothetical index fund, and then pull it out at age 75 to spend. One round trip through the casino over 40 years will have a trivial effect on that dollar–the “casino” won't be getting much of a cut of it. Plus, the likelihood of that investor losing money on that investment over 40 years is so close to zero that the difference can be safely ignored.
Investing is serious business for me. I don't really do “fun money” or “play money.” If I want to have fun, I use the money to go heli-skiing rather than send it to some Wall Street gurus and Uncle Sam. I might be a thrill-seeker, but there is little thrill for me in investing, and it turns out that's a good thing for long-term returns.
What Does it Really Mean When an Investor Says “I'm Going to Take Some Money Off the Table”?
Well, it could mean any of several things.
They Are Timing The Market
What nutcase did Angel's Landing in the snow with those little kids? (Note the harnesses and rope.)
Most commonly, it means he is trying to time the market by going to cash with some or all of his investment. He believes that the market is going to go down in the near future and that he can then invest the money back in the market.
I'm not sure I need to go over why this is a dumb idea, but the difficulty with market timing is that you have to be right not once, but twice, and you have to be right by enough to overcome the transaction costs including taxes and the value of your time. It is so hard to do that consistently over the long run that it isn't worth trying. As a general rule, all that “going to cash” is going to do is decrease your returns.
They Are Selling Investments to Spend the Money
For some people “taking money off the table” means to sell investments and spend the money. While I'm a big fan of spending money on things, experiences, and charitable causes that will increase your happiness, it is important to be aware of The Wealth Effect. That is to say, when our investments go up we feel wealthier and are more likely to spend. That's not such a bad thing since spending the same dollar amount from your portfolio when it is up means spending a smaller percentage of it than spending from it when it is down.
However, it is important to remember that you're not really as rich as you think you are in a bull market (but neither are you as poor as you think you are in a bear market.) “Mr. Market” has some rather volatile moods which even out over the long term for the patient investor. Bipolar disorder might not be contagious, but catching Mr. Market's moods certainly is.
They Are Wisely Trying to Take Less Risk With Their Asset Allocation
A few people use the phrase “taking money off the table” when referring to a permanent change in their asset allocation. Bernstein likes the phrase “When you win the game, stop playing.” That is to say, if a recent bull market has decreased your need to take risk, then take less risk. Most investors will want to decrease the “shallow risk” (volatility) of their portfolio as they approach retirement to reduce sequence of returns risk (i.e. the risk of running out of money despite having adequate average returns because the poor returns showed up early.)
It seems wiser to make that sort of an asset allocation change a few years into a bull market rather than after a recent 30% drop. Isn't that market timing too? I suppose it is in a way, but I see it more as a reaction to your own personal situation (nest egg to financial needs ratio) rather than a reaction to Moody Mister Market.
So the next time you hear someone use the phrase “take some money off the table,” rather than think “That sure sounds smart,” I want you to remember it probably isn't very smart at all if the intent is for that money to go back on the table at some point.
What do you think? What common investing phrases annoy you? Have you been guilty of “taking money off the table?” Why did you do it? Did it work out well for you? Comment below!
Is not investing cash, eg leaving it “on the sidelines” the functional equivalent of “taking some money off the table?” Because we have six figures uninvested in the market as we search for a different house and wanted to keep our options open for down payment, etc. Did we miss out on some market returns due to this? Yes, but I’m not sure what I would have done differently as I’m not sure it makes sense to sell stocks and generate a taxable event for that. Maybe the money isn’t just on the sidelines/off the table if it’s for a specific purpose, even if that property search has stretched to almost a year at this point?
Money you keep out of the market because it is short term money is hardly the same as trying to time the market. That money should never be in the market anyway. It’s like next month’s estimated quarterly tax payment. That’s just going to sit in cash until I need it. A year is short term money in my book.
It’s phrased different ways but my investing pet peeve is “this money is just for having fun.” I hear it all the time from people rationalizing why some portion of their investments are for day trading, stock picking etc. they tell me it is fun to follow the markets and listen to the talking heads and follow their gut. When I remind them that time and again this has shown to be a losing strategy, they assure me that they are essentially ok if this money gets thrown away.
Never understood that.
The Prudent Plastic Surgeon
It’s essentially fantasy football, which I also don’t do, but in this case you’re wasting both time AND money. I suppose if you see it as entertainment and any associated costs are worth that to you, that’s your decision. Goodness knows there are plenty of other hobbies I can’t wrap my mind around.
I love reading articles like this. I hate trying to time the market. I’ve made my best investment decisions by simply holding on to investments.
Retirees might want to re-asset allocate if they lost sleep in march
there is a strong possibility of another d ownturn when the Feds turn off the money stream
Yes, here is where some of the finesse comes in.
Reducing your allocation to stocks when you are at or near the end of your working career makes a lot of sense. Especially given the horrific macroeconomics right now. If you have used up most of your “human capital” and need to avoid a SOR risk, go for it.
Some would call that “market timing” but I’m not sure it is. It may be a prudent response to internal emotions, market valuation, etc. Many gurus like Ben Graham have done similar moves.
Regarding the line about playing the game after you have already won: Assuming winning means having something like 25x annual spending, one still must continue to have some stock/equity exposure or they take on too much inflation risk. The assumption for the 4% sustainable withdrawal is that you keep at LEAST 50 % equities, probably more like 75%. So barring a much lower withdrawal rate, you don’t really get to stop playing the game until you die.
True that.
The author who popularized (but didn’t invent) that phrase was Bill Bernstein.
He also said that 4% SWR is wishful thinking for most. And that you should keep working and earning and never stop saving and investing.
Reminds me of whoever (Tim Ferris?) said that retirement is just the back-up plan if you can’t work.
Sure, invest regularly but having some cash on the sideline is not a bad option. We just went through probably the best buying opportunity in many years with Covid fears. Be greedy when others are fearful said a quite good investor. I get that many just want to buy the index fund and forget it, because it takes too much time and individual stocks are “risky.” Yet those same individuals will pore over real estate syndicates and invest tens or hundreds of thousands in these. Kind of funny to me.
I guess I’ve been giving this some consideration over the past few weeks and would welcome feedback from others on this forum. We’re obviously in uncertain times, and the upcoming presidential election only serves to make the street more nervous. I’ve currently got about 70K in student debt, owe 30K on one vehicle (the other is paid off) and beyond that, the only debt I have is my home mortgage. Between my 401K and a trading account, I’ve got about $1.4 million invested in the market. I’m considering taking 100K out of my trading account, paying off my student debt, paying off my car, and then re-financing my house (hopefully at ~2.5% for 15 years). Paying off my student loans and car will save me about $1500/month which I can start pouring into my home mortgage or possibly buy another rental investment property.
So I guess this plan would qualify as “taking some money off the table” but I still think it’s a reasonable plan. Thoughts?
I’m surprised you have over a million in retirement and taxable accounts and are still carrying student and car loans. I don’t think your taking money out of a trading account is taking money off the table so much at it is paying down your debt (eg negative bonds if you like to look at it that way). It’s not like you plan on having the cash sitting idly by waiting to time the market. There is always uncertainty in the market, but you are essentially guaranteed to increase your wealth by paying down those debts.
I’d definitely pay off the debt. Probably including the mortgage. Great use of money at all times and especially with the market at historic highs.
Look at the TRINITY STUDY you do not need 50% equity to have a 100% s uccess rate over 30yrs
anyways these studies are past performance obviously and now we are in very very different times with all time equity highs and very low rates
nobody ever lost money taking a profit
Let’s rekindle the conversation. I’m taking money off the table Monday. Why? It is not an IRA. I also pay myself from my account to make a living. That point wasn’t touched on.
Brian