10/11/2013 1:30 AM ET|
Ignore pundits predicting a crash
Trying to time the market's swings is a fool's errand. And unlike in other pursuits, investors who 'do nothing' are often rewarded for their patience.
There are many reasons to be concerned about the market these days. Among them are the government shutdown, the recent run-up of the market and the fear that stocks are currently overvalued.
This uncertainty has the financial media -- always on the alert to exploit fear and greed -- going into overdrive with "helpful" articles like "How to spot the next bull or bear market."
There are only three possible answers to the query about whether the market is likely to crash:
3. I don't know
Many brokers and advisors will give a variation of numbers one and two. The only accurate answer is number three.
It's appealing to try to change your asset allocation based on the latest financial news, but you should avoid the temptation. Vanguard nicely summarized the data showing the likelihood of market timing strategies as "remote" in an excellent white paper.
According to Vanguard, "the average professional investor has persistently demonstrated an inability to time the market." Vanguard cited two seminal studies. One showed meaningful market-timing ability in only one of 57 mutual funds. Another found evidence of market-timing skill in only three out of 116 mutual funds studied.
They also referenced additional studies showing investment newsletters, pension funds, investment clubs and professional market-timers "failed to demonstrate consistent success with market-timing strategies." If the professionals have this dismal of a record, how do you like the chances of you and your broker?
The problems of trying to time the market are many. Short-term movements are random and unpredictable. Prices change rapidly, making it difficult to predict them with any certainty. Missing a relatively few of the best trading days by "sitting on the sidelines" can have a seriously adverse impact on your returns.
If uncertainty in the markets is keeping you up at night, there's a better alternative to market timing. Reduce your allocation to stocks and increase your allocation to high-quality, short-term fixed income bonds like Treasury bills. Your expected returns will be reduced, but so will the volatility of your portfolio. You will be able to more comfortably withstand another market crash.
Unlike other activities, investors who "do nothing" are often rewarded for their patience. Your ability to follow this advice may depend more on your emotions than on a rational analysis of how markets work.
Here's sound advice from Jonathan Clements, a highly respected former financial journalist at The Wall Street Journal: "What to do when the market goes down? Read the opinions of the investment gurus who are quoted in the WSJ. And, as you read, laugh. We all know that the pundits can't predict short-term market movements. Yet there they are, desperately trying to sound intelligent when they really haven't got a clue."
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Don't time the market? Just ride the ups and downs, never moving your money out of a falling issue?
Sounds like what all the hedge fund managers would like you to do. They like you to "go long", so they can cover their short positions.
People need to learn more about the markets and not heed this advice.
by all of the thumbs down on my previous post, maybe i didn't explain my opinion well. second attempt.
after a very strong run-up in the 1990's, in 2000 we hit the top of the tech revolution and a "tech bubble" that was bound to burst simply due to the steep plane of the market increases. there was talk of a "new economy" and massive bets put on stocks that had never made a dime in profits. the rest is history with a resulting huge decline in the nasdaq and about a 50% drop in the markets in 2001-2002.
after 5 years and another strong bull run (2003 was the best year), greenspan had built the housing bubble and wall street built a corresponding credit bubble by building/selling artificial financial WMD called "cdo's" etc. the crash was foretold by noted economists such as nouriel roubini as far back as mid-2006. again, there was an over 50% decline in US markets and more than that internationally. the global financial system faced economic armageddon (complete collapse).
after 5 years and an incredibly strong bull market (over 156% increase), we have now allowed the formation of an "asset bubble" by ben bernanke, barack obama, and an uncontrollable combination of CEO's, bankers and wall streeters. the top of the market was about 1,565 in 2000, and about 1,565 in 2007, and now 1,725 in 2013.
so thumb away ... just don't insult my intelligence by saying "this time is different" ... or by positing that you can make more total return with a buy-and-hold toned-down asset allocation model instead of going to cash before the bubble bursts and then re-entering near the bottom ... it is only a matter of time and 2014 fits all too well into the every-five-years pattern for a bear-market drop ...
be safe out there ....
I am seeing a market crash if foreign countries will not accept American dollars and withdraw their investment in American markets.
Our National Debt will be way over $20 Trillion with the FED holding at least half in stuff they can't sell. Interest rates would have normalized and interest savings/bonds will be paying far more per year than stocks. So I have a hard time buying the concept of putting away your Money in Stocks and expecting all of your principle to be left 5 years and counting from now. This concept of long term is Ancient History. If you need that money after 5 years, chances are it might not be there.
Folks will be better off learning Skill SETS that enable to them to earn income which allows them to not worry about having to invest in Stocks. Create a Business that pays you regardless of the Stock Markets. Learn how to grow your own food and fix things yourself. Live way below your means for the next 5 years and pay off your DEBT before even considering anything else. Stocks are plain and simple a glorified Casino. You can literally lose everything.
As Warren Buffett famously stated about the state of the stock market....it will fluctuate.
For most people with long term money, which is money that is not expected to be needed for about 5 years or longer, investing in equities is your best bet long term. Short term money would be 6 months or so of low volatility money or money earmarked for certain things like a car, education, home, etc that you expected to use within 5 years or so. Of course instead of 5 years you could reasonably use anywhere between 3-7 years depending on your appetite for risk or your overall annual financial footprint and investment net worth.
Thank you Active,
I've been saying this the last 14 years, when I LOST 20% of my "savings" in wall street. After THAT fiasco, I've kept my money OUT of wall Street. It took me a day and a half to get in touch with my broker to get my money out. "NEVER again will I go through THAT, I thought", and I never did. I put my money in certain commodities [that shall remain nameless, but read between the lines] and have kept WELL AHEAD of helicopter benny's inflationary policies.
I am going to tell the writer of this article one thing:
THE MARKET HAS, CAN AND WILL CRASH. Maybe not tomorrow, but what is pushing the market up right now, is NOT a booming economy, it is COUNTERFEIT MONEY. That has happened before, and WILL happen again. LOOK at your history.
If Uncle Ben wasn't printing Trillions along with the other Global FEDS, folks could consider longer term holding. These days, it's likely most would be better off locking in Profits when they get them then repeating the process. Holding to infinity is Ancient History as long as the Global FEDS are manipulating Broken Markets. The National DEBT is out of Control not only here by globally. Yet some paid to promote stocks shill wants everyone to ignore that.
If taxes were on final consumption only – no item or person exempt, $35,000 annual income – and we bought $100 in groceries then added taxes, the taxes would be $5 for local taxes (cache valley, Utah), $25 for state taxes, (Utah), $30 for federal taxes or $60 in taxes. If we paid off the 17 trillion dollars in federal debt, 15 year payout, at 5% interest, there is another $14. If we added the unfunded government liabilities, 75 trillion dollars, 30 years payout, at 5% interest, we would add another $43. To buy $100 in groceries and pay for government, those groceries would cost $217. But don’t take my word for it, use your own pencil. And we are fighting over adding another government program (Obama care), unbelievable!!!!
Now let add another comment for investors. If we were to cut state and federal spending by 1\3 that is $18 more to spend. If we paid off the federal debt there is $14. If we cut unfunded liabilities by 1\2 there is another $21.50. Or $53.50 in additional spending power. What would that do for the stock market?
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