Archive for June, 2009

In November of 2007, I had an overwhelming impulse to bail out of the market.  Call it experience; call it a gut feeling or maybe a tip from God.  I just knew that I should move all of my holdings in my 401k plans out of the market and into cash. So that’s what I did.

In November of 2007, the DOW still sat at over 14,000.  The fact of the matter is that I bailed out of the market and sold off my equity holdings near the absolute high.  WOW………..what a genius…..er……actually not.

Market timing usually requires being right more than once.  In this case, I made a great decision and sold my stock mutual funds near the markets high.  That would have been a monumental piece of brilliance except for one small problem; I didn’t get back into the market at the right time.  As a matter of fact, I didn’t get back into the market at all.

That was stupid.

This is the problem with market timing. You can get one side of the equation right, but it often requires that you get both sides right.  I hit the high but missed the low.  I didn’t even get back in close to the low.  That is missed opportunity.  While I preserved capital the last couple of years, I lost out on a tremendous opportunity to make some real money in recent months.

The Dow Jones Industrial Average hit a 12 year low on March 9, 2009.  Since that time, it is up 34%, and I missed out on every profitable day. Did I benefit by market timing; a concept I have not believed in since the early eighties?  Not in this case. Yes, I preserved capital when others lost 30%, 40% or even 60% in their equity funds, but I missed the bottom and that was a missed opportunity.

Another example that bears mentioning is the fact that millions of people continued to contribute to their 401k plans while the market has been in free-fall.  Was that smart?  You bet it was.

If you went to your favorite retail store and bought clothes for your wardrobe every week, you might consider paying full retail. The cost of your entire wardrobe would have taken a big chunk out of your household budget.  Those clothes are never worth what they cost the day you bought them, so paying full price resulted in an expensive wardrobe.

What if you only bought clothes from that retail store then they were on sale?  And just imagine the benefit to buying those clothes if you could get them on sale for 60% or 70% or 80% off?  Your entire wardrobe would cost considerably less.  If clothes appreciated in value, you would be really well off. 

For those people who continued to invest in their retirement plans over the past couple of years, they were buying the underlying equity mutual fund shares on sale.  As they got closer to March 9, 2009, they were getting those shares at a real discount. If they contributed $100 every payday to their retirement plan, they might have been buying three shares of each mutual fund two years ago, but they may have bought ten shares earlier this year.  When the value of those share increases, as they have in the recent few months, their retirement plans are growing at a great rate.

Did these people practice market timing? No, they did just the opposite, they ignored it.

Do I jump back into the market now?  Chances are, I will be better off if I do it now than wait any longer.  Do I know that the market will continue its sharp rebound? No, I don’t know that at all.  I do know that the market has been cyclical in the past, and a dropping market has always rebounded….eventually.

In summary, my message is this; market timing is for the birds.  Some people swear by it, but the truth is, everyone misses the top and everyone misses the bottom.  Good investors simply invest.  They invest today, tomorrow and a month from now. They trust the cyclical nature of the market and they wait.

Should a person who just retired ignore signs of a prolonged bear market and watch it drop? Chances are that these people should bail out…………….they may not need to put all of their investments back into the market in the future anyway.  For the rest of us, we just need to be consistent investors.  Ignore the impulse to time the market and invest like your future depends on it.  Get it?