Thursday, September 13, 2007

To Time or Not to Time...

Some of my readers, friends and colleagues who know my opinion regarding the precarious state of the economy have been asking why I am still invested in the market if I think that it is likely we are headed into a recession. This is a very valid question and I think that the answer makes worthwhile post. Here are the three reasons that I am staying in the market and will continue to do so, regardless of my beliefs as to the state of the economy:

1. Timing is Bad for Your (Financial) Health - last week I read an excellent article in a Schwab publication that my wife received. The bottom line of this article is something that I have known for a long time, but have never tried to quantify: market timers lose money. This graphic really drives home the point. Here is a quote from the article:

"...for the 20 years 1986–2005, the S&P 500® index had an annualized return of 12%. Unfortunately, the average equity fund investor had significantly lower returns—only 4% annualized (barely nudging out inflation). Most interesting, though, was the difference in returns between "systematic" and "market timer" investors. For those who were consistent in their investments, the annualized return jumped to 6%—still only half that of the S&P 500 but much better than for the average investor. On the other hand, those investors who tried to outsmart the market by timing their inflows and outflows saw their returns plunge well into negative territory—generating an annualized loss of 2% over the period!"

I don't know about you, but negative 2% annualized returns don't sound that appetizing to me.

Here is a link to the full article, in case you want to read it for yourself.

2. I Am Not That Smart - quite frankly, I am wise enough to admit that I am simply not smart enough to predict the course of the economy. I have some ideas and I have some feelings and opinions on the subject, but I don't delude myself for a minute by thinking that my opinions are anything but opinions. Moreover, I am not going to try to outguess the combined wisdom of hundreds of millions of investors. The markets may not be correctly valued at all times, but the chances that I am the only one that will spot a pricing error are not very good.

If you think that you can time the market, you are implicitly saying that you are smarter than the person who will be buying the stock you are selling. For all you know that person may be a finance professor, a hedge fund manager, a star broker or the idiot day trader down the hall. You simply don't know. Under such uncertainty, you should assume that the person buying your shares is just as smart and informed as you are. What makes you think your decision to sell is better than his decision to buy?

Let's face it, I am simply not that smart, and neither are you... although have I told you lately how good looking you are? Have you lost weight?

3. Uncle Sam Always Wins - regardless of whether I make the right timing decision or the wrong timing decision, as soon as I get out of the market I automatically lose. Uncle Sam reaches deep into my pocket and grabs his share of my gains. That makes the cost of getting out of the market pretty steep.

So, even though I think the economy is not in great shape, I will hold my ground and continue to regularly invest and follow my long term asset allocation plan. Steady as she goes.


Market Timing said...

cool article thanks

Market Timing Signal said...

Market timing saved a lot of portfolios from financial ruin over the last 12 months...