Within one month we’ve read these news headlines: “The Dow jumps 936 points and S&P up 104, in the biggest point gains ever” and “The Dow and S&P 500 suffer their worst one-day percentage drops since 1987.” No doubt we’re on a financial rollercoaster.
I bet that you, like most of your friends, have recently called your financial adviser to ask: “Have we hit bottom?” or “Is now the time to buy?”
These are questions about market timing. Moving out of the market just before it starts to go down and back in just when it’s heading back up is something even the most experienced investment professionals have seldom achieved with any consistency.
For example, some investors believe that when the market is down they should sit on the sidelines until it rallies. Other investors think that when the market is up they should wait for a correction to buy at what they feel are discount or bargain rates. And others try to use economic or cultural indicators to predict which direction the market will go. These tactics seldom work in the long run. You could ask someone who tries to “time the market” what is a good correction point at which to buy: 10 percent? 15 percent? And if a correction doesn’t happen, you could ask her at what point would she say she was wrong: when the market’s up 10 percent? Or 20 percent?
Waiting on the sidelines can be costly. If you don’t jump in at the right time, you can miss some of the market’s best days. Or you could jump in, the market could tank, and you’d be exposed to the worst days. Historically, according to several published studies, you’re better off staying invested.
No one knows for sure where the bottom is for any bear market or the top for any bull market. Not even my husband who runs a hedge fund has a clear vision for what’s next, and he reminds me that the only truth is that these are strange times and anything can happen. All anyone can do is assess the risk/reward ratio for buying stocks. Many analysts cite the lack of predictability as a reason to buy and hold, ignoring short-term twists and turns. The only thing that is certain, they argue, is that over a long enough run, stocks go up.
Personally, I don’t believe in this purely optimistic strategy. So I’ve decided to hold onto the funds and stocks I believe have good fundamentals and will be somewhat sheltered from this recession, and sell others that are in failing industries even if I take them at a loss. None of these decisions will be based on where I think the market will go tomorrow and the next day and the day after because I don’t want the hassle of thinking about that much granularity, which requires tolerating extreme volatility.
In my opinion, it’s not market timing but time in the market that usually brings about the potential for long-term success.