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Timing the Market a Waste of Time

Theoretically, timing the market could give you a huge payoff. At a recent conference I attended sponsored by Dimensional Fund Advisors, Walton Wellington, Vice President of Investment Strategies, gave the following numbers.

Suppose, 70 years ago, you put $1000 in a savings account. It would have grown to $16,000. If you had invested in the S&P Index and left it alone, you would have $1.8 million. If your holdings included an index with over 3,000 companies, you would have $13.4 million.

However, had you perfectly timed the market, buying at the start of every bull market and selling at the top, you would have $7.2 billion. Conversely, had you sold before every bull market and bought at the top, you would have $3.40, enough for a cup of coffee at Starbucks.

No one can reliably predict the market. That includes the experts who are supposed to be able to do so. The stock-picking hall of shame is a crowded place.

In 1980 the U.S. experienced record high inflation and interest rates. I remember FHA mortgages at 14%, a prime rate of 20%, and inflation topping 15%. Gold was on a tear and real estate prices were escalating like crazy. The Dow was 759 and gold sold for $850 an ounce. Many mainstream publications announced that investments in paper assets like stocks were dead.

Instead, we began a 20-year bull market in stocks and a bear market in gold that would see gold dropping to $250 an ounce and the Dow Jones hitting 11,500. I remember it well. I owned gold and didn’t own a single stock.

In 2001 P&I magazine polled a group of elite advisors, all of whom said 2002 would be a great year. It was another disaster. In 2002 Bill Gross, who runs the largest mutual fund in the world, said “stocks stink” and that the Dow was going to 5,000. In October of 2002 the Dow went up 969 points in four days and entered a new five-year bull market, closing at over 14,000.

In 1999 economic researcher Harry Dent wrote a book predicting we were about to enter a golden era of investing. He said the Dow Jones Industrial average would be 44,000 by 2008. Instead, the Dow suffered two market crashes and closed 2008 at 8,776. In 2009 Dent published a new book about the coming worldwide depression. Maybe there is hope after all!

In 1997, BusinessWeek said Coca-Cola was the one American company to own. Five years later, it was down 18%. In 2004, Money magazine told readers to forget about owning Apple. Its shares are now up 30 times and its value is equal to the 32 largest European banks.

In 2005 The Wall Street Journal asked some of the top analysts in the world to pick the top ten best and worst companies for the next year. Their top ten didn’t do too badly, beating the market by 3%. But their ten worst picks did even better, beating the market by 10%.

In 2000 Fortune magazine selected a group of elite stock analysts to pick their favorites for the coming year. While the market lost 9%, their picks lost a whopping 22%.

In 2001 Money magazine featured America’s safest stock, Fannie Mae, which sold for $79.50 a share. Today the company is nearly bankrupt, it was placed into conservatorship of the Federal Housing Finance Agency, and it sells for 30 cents.

If, after all these examples, you still think you can time the markets, here’s my suggestion. Save yourself a lot of time. Just go to Starbucks now and buy that cup of coffee.

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8 Responses to Timing the Market a Waste of Time

  1. H Christian September 26, 2011 at 9:13 pm #

    Here is the real question. Given where the market is now – - – - what do I do?
    All you “market experts” who relive the set of statistics that is relevant to make your
    point – - “stay with me – - I need your override commissions and investment fees”
    Why don’t you give the investor your 100% fail safe strategy to grow the market
    in the current scenario. In other words, if you know so much, why didn’t you see the
    bust coming in 2008 and the recovery in March 2009. And with these volatile swings,
    tell your clients about your guaranteed ways to profit in these difficult times. I will tell
    you why you dont – - -because you know no more than the rest of us. The only difference
    is that you have chosen a working career of charging people who think you know more
    than them. I have heard a hundred times “just hang in there”. No one said “get out, we
    are going down” or get in “we are going up”. If, in fact, the best outcome is to stay in the
    market during good times and bad, I do not need you – – - I can simply invest into some
    diversified index funds and go fishing. If your advice can not beat the averages, I see no
    reason why you are worthy of commission. Respectfully submitted.

  2. Jude Boudreaux September 27, 2011 at 10:11 am #

    Christian,

    I understand where you’re coming from. I think if you take a look around at Rick’s website and some of the other things that are written about here, you’ll see that what Rick and other planners really provide goes far beyond just the management of investments.

    Jude

  3. Owen J October 2, 2011 at 10:56 pm #

    So Rick, IS it different this time?
    US Stocks virtually flat for 10 years.
    Retired folk waiting a long time for any return on their capital.
    Not saying you are wrong, just wonder if you’d care to share your perosnal opinion along with some well-trodden hisorical facts which are largely academic as I have never met any one who invested in public stocks before 1970 (and I have met quite a few people).

  4. Rick Kahler October 3, 2011 at 6:35 am #

    Owen,

    While the circumstances seem to be different, I contend the response is the same. Don’t try to time the markets and maintain a diversified portfolio. Most retired folks should have a minority of their entire portfolio in stocks. Those that had portfolios with 8-10 asset classes (US stocks is only 1 asset class) saw returns of 5% to 7% over the past 10 years. That is certainly no wipe out! If a person had the majority of their investments in US stocks for the last 10 years, then what you say is true. It hasn’t been a pretty picture.

  5. Rick Kahler October 3, 2011 at 6:37 am #

    Owen,

    While the circumstances seem to be different, I contend the response is the same. Don’t try to time the markets and maintain a diversified portfolio. Most retired folks should have a minority of their entire portfolio in stocks. Those that had portfolios with 8-10 asset classes (US stocks is only 1 asset class) saw returns of 5% to 7% over the past 10 years. That is certainly no wipe out! If a person had the majority of their investments in US stocks for the last 10 years, then what you say is true. It hasn’t been a pretty picture

  6. frans bararuallo May 14, 2012 at 9:57 pm #

    The important question is “how can we know this is the raght time to invest our money and in what filed we must done it”?

    Please give me some reasons and the right way-out.

    Thank you,
    frans b

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