Market Timing ... People Often Act Contrary to Their Long Term Best Interests When Buying and Selling Stocks

Over the short term, stock prices fluctuate and sometimes widely. Everybody knows that.

Over a long period of time stock prices will rise, and by a lot. Everybody knows that as well.

The economy today is struggling and has been for some time now. Everybody knows that, too.

This is no 'normal' economy and the future economic outlook is quite troublesome. We shouldn't plan for a near term resumption of what we used to label as 'normal' economic growth. That's what not everybody knows. And that may result in the stock market falling over time.

The days of 3% annualized real growth haven't been part of the financial picture for the past several years, and it looks to me like they won't be coming back anytime soon either. Too much debt, too much government meddling and too little productivity and private sector investment are the main underlying reasons for this glass-is-less-than-half-full reasoning.

So here's my advice to individual savers and investors. If you're not prepared to ride out the storm that may be brewing in the stock market for the next few years, get out now. I may be a glutton for punishment, but I'm staying in it for the long haul.

Now let's look closer at short term market timing.

It's another silly political season and a wild election year. And if that's not enough to get your attention, interest rates are going to be raised by the Federal Reserve once or more prior to year's end. That's in the face of a slow growing economy with lots of debt and few income gains.

Then there are the many foreign issues to consider as well, such as oil prices, China's economy, trade wars, currency devaluations and terrorist attacks.

Finally, many stock market pundits disguised as experts are telling us it's time to 'sell in May and go away.'

So what's a long term oriented individual saver and investor to do? And if we do decide to sell now and 'go away,' when will we know it's safe to come back and buy again?

Now let's consider all these things by putting the various short term worries in their proper longer term perspective.

When we were young, our parents told us not to follow the crowd --- 'Just because everybody else does it is not a good reason for you to do so,' they would say. Or 'Just because your crazy friend jumps in the lake doesn't mean it's a good idea for you to do so.' It was usually good advice but it was seldom heeded. That's youth.

But now we're older. And that good advice of not following the 'herd' applies equally well to owning and selling stocks for the long haul instead of 'timing the market' by making short term ill advised moves. And they're ill advised because short term moves, even when we guess right, usually result in longer term problems --- such as knowing when the coast is clear and it's time to buy again.

Investors throw in the towel on stocks tells an unsurprising but sad story about individuals and their behavior toward stock ownership for the long haul:

"Last week came the news that investors were pulling money from global stock funds at the fastest pace since 2011 — $44 billion in five weeks and nearly $90 billion so far this year.

The Usual Experts gave lots of reasons for this — uncertainty about Federal Reserve policy, weakness in Japan and Europe, and slower-than-expected GDP growth in the U.S. and China, as well as the market turmoil that ran from last summer until early this year. All of this supposedly sent individual investors running for the hills. . . . No, individuals have been staying the course, for the most part. But their course is to keep as far away from the stock market as possible. This retreat from equities has been going on for eight years.

Gallup regularly polls Americans about their ownership of stocks and equity mutual funds. Last month it found that only 52% of Americans said they had money in the market, matching the lowest ownership rate in 19 years of polling. In April 2008, just before the financial crisis began, 65% of Americans said they had money in stocks. That was the peak. The number slid steadily until 2013, and has stayed around that depressed level ever since.

Interest in stocks also remains low. As the table below shows, only 22% of Americans told Gallup in April they viewed stocks as the best long-term investment. That’s up from the nadir of 15% after the financial crisis, but it’s way down from the high of 31% in April 2007, just months before the market hit its previous all-time high. (By the way, interest in real estate is the highest it’s been since just before the housing bust. Uh-oh.)

Americans’ opinions on the best long-term investments:

Polling date	Real estate	Stocks	Savings accounts or CDs	Bonds
April 2016	35%	22%	15%	7%
August 2011	19%	17%	14%	10%
April 2009	33%	15%	34%	12%
April 2007	37%	31%	18%	10%
July 2002	50%	18%	16%	13%
Source: Gallup

What to make of all this? Well, the most obvious conclusion is that the financial crisis and global meltdown that followed scared the pants off many investors.

After the stock market plunge of 1929, the Dow Jones Industrial Average ultimately lost nearly 90% of its value, and it took 25 years to reach its pre-crash peak again. That and the devastation wrought by the Great Depression scared a whole generation out of the stock market.

This time around, the S&P 500 fell 49% from its 2000 all-time high to its 2002 low and 56% from October 2007 to March 2009. Just as baby boomers started to retire en masse, many investors said, well, two strikes and you’re out.

That’s too bad, because those who hung in have seen their 401(k) balances recover to their 2007 levels, and then some.

Unfortunately, not everybody could stick it out. Why? They just didn’t have the money. “Although Americans in all income groups are less likely to have stock investments now than before the Great Recession,” Gallup reported, “middle-class Americans have been the most likely to flee the market.”

Indeed, the percentage of those earning $30,000 to $74,999 a year that had money invested in stocks fell from 72% in April 2009 to 50% in April 2016, a 22-percentage-point decline. When you break it down by age, Americans from 18 to 34 showed the biggest drop in stock ownership.

This is one more sign of the hollowing out of the American middle class and the parlous financial state of millennials — and perhaps another explanation for the rise of Donald Trump and Sen. Bernie Sanders — in this wild and crazy election year.

To invest in stocks, you have to believe in the future, and it looks like many Americans gave up on the future a while ago."

Summing Up

Staying the course and waiting out the inevitable market storms isn't exactly a fun time when the fit hits the shan in financial markets.

And all this short term unsettling turmoil happens at least very few weeks, months and years in the financial markets. At least that's the way it seems.

But then the market always comes back and climbs to higher prices over time. At least it always has.

I'm definitely not smart or lucky enough to know the two things required of a successful market timer --- (1) when it's time to sell and thereafter (2) when it's time to buy again. 

So I don't even try to play that market timing game.

We should each take the time to think through how smart we believe ourselves to be about 'market timing' before deciding what to do about investing in, and experiencing the inevitable volatility of, stock prices over time.

That's my take.

Thanks. Bob.