Earlier this week I spoke with a friend and happened to mention that I think we are due for a substantial correction in the stock market. I am one of those who was expecting a fairly strong economic recovery to take hold, but over the last month or two I have been less optimistic. For one thing, I think that the stock market rally is overdone. For another, I feel that things are getting somewhat shakier, but I can't quite place my finger on the reason for this. It feels like there is another shoe out there somewhere and it may be getting ready to drop. Sovereign debt default somewhere in the world (Greece? Iceland?); an overheated Chinese economy cooling down? Continued weakness in the US housing sector? Or is it simply the fact that the stock market bounced up too sharply and too high over the past 10 months? I have no idea. I just know that I don't feel all that well about the prospects for the economy in the short term.
I previously shared these concerns with my friend, but to my surprise he seems to have acted on my doubts. He told me that after he recently lost his job, he rolled his 401K into an IRA but is holding the money in a money market fund, waiting for whatever pull-back in the stock market to occur before putting it back to work.
I was aghast. "Are you insane?" I asked him. Why would he listen to me? I don't listen to me. Yes, I talk about my feelings regarding the economy. I speculate about investment strategies and about the state of the stock market, but I never follow my own advice. My money is invested in index funds, precisely because I don't trust my own judgment and hunches enough to put my money where my mouth is. In fact, if he were to listen to me about anything it should be about the following statement: you can't beat the market, and market timing is a particularly bad form of guessing. The investment strategy that I follow is a simple one: small, regular purchases into index funds that cover my desired asset allocation.
After our talk, my friend decided to divide the money in his newly rolled out IRA into 12 equal parts, and to move one part per month into his chosen asset allocation. Now that's a smarter decision. Seriously people, I am not qualified to give investment advice. Almost no one is.
Enjoyed this post? Please consider subscribing to Money and Such by free RSS Feed or by email. You can also follow me on Twitter.