Sep 15 2008
Market Timing Means Missed Opportunity
The below article was written by my colleague Dave Blair and published in our client newsletter this past summer. In light of public perception, it deserves a second look:
As the markets continue to stumble along driven by fear and emotion, some people have asked if they should be getting out of the market to “protect their investment.” Note that these are not clients asking the question, our clients already know the answer.
Short term volatility is the price we pay for long term success in building wealth.
You can see this chart in Roland’s new book, Manarin On Money.
Over time equity ownership positions have moved up and down but have always trended up. Like a yo-yo climbing a flight of stairs.
Market timing requires two perfect decisions, whereas, staying invested in quality, professionally managed stock mutual funds requires only one decision. Nobody makes two perfect decisions all of the time.
A Wall Street Journal article about bear markets since World War II referenced a study by SEI Investments. The article stated that stocks rose an average of 32.5% in the 12 months following the market bottom. If you missed the bottom by one week, that return fell to 24.3%. If you waited three months after the market turn your gain was cut to less than 15%. Market peaks and bottoms are only identified looking back in history. The “experts” do not know today. Why risk missing larger gains by taking the loss now and then waiting too long to get back in? Those are two poor decisions made with emotion.
A Gale Group article points out that “In the 1980s, in 2526 trading days, the Standard & Poor’s 500 Index rose an average of 16.2%/yr. Nearly 80% of those gains took place in just 40 days.”
A Money Magazine article by Stephen Gandel noted that in 1974 the Dow Jones Industrial Average plunged 30% in the first nine months of the year, only to rebound 16% in October. Similarly, stocks jumped 21% in 2003, after three years of big losses.
Many people missed the boat and the opportunity to make larger gains just by not being patient. We have declined in this bear market; there is no point in making a bigger mistake by missing the rally that follows all bear markets.
Another part of the picture is not understanding the real world consequence of the “safe” investments. It goes without saying that in today’s interest rate environment the yield on money market accounts, CDs, and bonds is likely less than inflation. Add taxes to the mix and you have an investment guaranteed to lose money over time.
So what, you say. At least I’m not losing my principal like the stock market. Be careful what you wish for.
More than one financial institution has taken a financial write down to keep their money market account value at a dollar. That’s right; your money market account share is not guaranteed to be worth a dollar. Not only are you losing money to inflation and taxes, the principal amount is not guaranteed. You will be safer and wealthier over time if you are an owner and not a lender.
Secondly, the price of bonds moves in the opposite direction of its yield or interest rate. In today’s low interest environment, bonds are priced high. As interest rates increase, the price of your low yielding bond will decline so you are left with a low rate of return that does not keep up with taxes and inflation while losing some principal amount at the same time.
In a March 2008 article for Knowledge@Wharton.com, Professor Jeremy Siegel stated that if stocks were to decline another 5% to 10%, “I think that it could be the buying opportunity of the decade for investors…”
It is difficult to be patient when the crowd is running for the exits but that is usually when one should be buying more. Stay patient and history tells us we will be rewarded. Remember, our money is invested where yours is.
By Dave Blair Email: dave@manarin.com Phone: 402-330-1166
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