Timing the Market
The average investor who tries to time the market habitually makes the wrong moves. Caught by the emotions of greed and fear, motivated by the media that constantly sells the “crisis du jour,” and not having a disciplined approach, they turn out to be the loser.
Look at today’s stock market. After skyrocketing from a market low in March 2009, the stock market (S&P 500) is up by over 40 percent, yet the main street investor is still disengaged and skeptical.
Looking back into the late 1990’s, most investors were confident that stocks were wealth-building perpetual-motion machines. Also the “buy and hold” disciples got religion around the top of the tech bubble in early 2000. At this point, the annualized trailing 10-year S&P 500 returns exceeded 15 percent, so the average investor poured into the market at the top. Bad move.
Today (October 2009), the trailing 10-year return is negative 2 percent (excluding dividends). It will stay weak until we absorb the melt-up returns of late 1999 and early 2000. Keep in mind the average rate of return for the S&P 500, since 1926, has been around 13 percent.
So, if the tremendous historical returns were a signal that was best left unheeded in 2000, then, do the lousy 10-year trailing numbers of today imply that … “the direction of mean reversion for asset classes will favor stocks again in the near future?”
Funny how the widespread acceptance of “buy and hold” was the mantra ten years ago, at the top, is being cast aside at the bottom. (Look back in history and you will see the same attitude every time the market drops.)
Research shows … over the previous period of negative decades, since 1900, the market was higher 70 percent of the time over the next one, three and five years. In fact, it was higher 100 percent of the time over the following decade. Also, the market returns over theses periods were, in general, better than average.
Keep in mind there are no guarantees for the future. At the same token, I have seen too many times over my career, how the markets always bounce back after severe setbacks (1973-74, 1981, 1987, 2000) and I believe the same will take place again. It will not be straight up, but I believe in America, the American people, the great companies of America and American ingenuity. Yet, I see people sitting on the sidelines until the market fully recovers and then they will invest at the top of the market … and … ride it down to a loss. They do it over and over again. Remember the definition of insanity?
Stay disciplined now … or experience regret later on …