When investing for the long haul, relying on short term 'expert' predictions about stock market moves is silly (maybe even stupid, as Professor Jonathan Gruber would say), but it's done.
Using this year as an example, investing based on short term guesses is silly, if not stupid, because (1) the experts predicted a much smaller share price increase than what occurred in 2014, (2) the pundits foresaw much higher interest rates than took place, and (3) everybody completely missed the dramatic decline in energy prices. Yet they're out with more guesses for 2015, and too many individuals will rely upon these predictions to their detriment when making their investment choices.
Over the long term, it's easy to predict that stock prices will increase. That's the experience of more than 100 hundred years, and it's simply what happens to the value of successful companies in our free market system. But even over the short term, herein defined as one year, prices are likely to increase. That's the historical fact as well.
In addition to the historical upward trend, currently many blue chip 'safe' stocks are paying cash dividends which are higher than the interest rates paid by bonds. That's one more reason why investing in stocks is a no brainer compared to investing in bonds. They pay out more cash in the short term, and they tend to appreciate in price over the longer haul.
So now we come to today's quiz question concerning the perils or advantages of 'market timing.' Is now: (1) a good time to be invested in the stock market; (2) a good time to take money off the table and get out of the market: or (3) neither? Well, my vote is for #1. For long term investors who will stay the course, now is a good time to be in the market. And if you're not already a long term oriented stock market investor, it's a good time to become one.
With respect to those short term traders who are trying to outsmart other short term traders and predict the market's short term movements, I have no clue what they should do. They are playing a different game than investing.
Individual investing for the long haul is often boring but it works. Trying to time the market's short term ups and downs is never a good game plan for individual investors. Long term stock market investors aren't gamblers.
Here's More Proof Why Timing the Market Is a Bad Idea has the story:
"With 2014 in its final month, this should be a good time to reflect on the most important major lesson about investing: That you have the appropriate time frame to take the risk associated with investing in a particular asset class.
Time and time again, most average investors get caught up in trying to figure out the best time to exit the markets or enter the markets. This is challenging enough for the experts who are engulfed in this data every hour of every working day, let alone going at it as an individual investor.
Check out these predictions from January 2014 from over 30 of the major chief investment strategists at various leading firms. On average, the peer group had the S&P 500 growing 6% and the year-to-date return of the S&P is almost double that number. They also had oil in the $105-to-$110 range, with the lowest number from any one analyst being $80. We all know that as of today, oil has dropped far below that $80 number, a far cry from a $105 prediction. . . .
While the S&P 500 is at all-time high and oil is in a precariously low price range, if these two asset classes belong in your portfolio and you have 10 years to invest your money, it isn’t something you should be overly worried about from a day-to-day perspective. Studies have shown for a long time that you can often be your own worst enemy when it comes to your portfolio. Be careful about getting influenced by the latest news article and assess what risk you can take, and how long you have to invest the money. Timing the markets will often blow up in your face."
Summing Up
Successful individual investors are in it for the long haul.
They also know enough about what they don't know to stay both humble and alert.
And they don't make the so-called pros richer by trying to engage in market timing on a daily, weekly or monthly basis.
To buy low and sell high isn't all that hard to do, especially if we are patient and wait for the right pitch to hit when buying, and then have the emotional stability to stay in the game long enough to sell high.
That's my take on market timing.
Thanks. Bob.
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