Timing the Market a Waste of Time

by | Sep 26, 2011 | The Economy, Weekly Column | 6 comments

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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