Fortune Teller

A Time to Remember—especially if you are a market timer

Fortune Teller

Do you ever have those moments when a flashback occurs, and you recoil from a shiver sent down your spine?

I had that moment today when I looked briefly at the 5-year chart of the S&P 500, shown below:  

What caused that visceral shiver was not the impressive ascent the market has staged in the last few years, but rather the contrast between the highs and lows—and, in particular, the horrific depth to which the markets fell before capitulation in March 2009.

We at IFA remember that time well. We spent many trying days counseling clients as to why they should NOT sell out of their portfolios. We found ourselves constantly reiterating “it is NOT different this time,” because free markets establish fair prices for the ever changing events, and we accept that the new events are fairly priced making fairness a constant over time. And we focused all of our energy on nothing but keeping our clients invested—despite all of the rapid-fire bad news disseminated by seemingly every media outlet.  We frequently felt like a lone-voice against a sea of voices.

We stayed the course, and the vast majority of our clients did too—clinging to their trust in us, our advice, our data, as well as their conviction in what they had learned about the markets.

Why bring this up now—at a moment when the markets have just hit new highs? Because, we just can’t help but think about those investors with advisors who recommended selling—those advisors who believed they actually helped their clients skirt short-term pain by getting them out in the throes of a down market. The short-term relief investors may have felt by selling out of their portfolios is now very likely long-term regret. However, if needed, there may be an opportunity to rebalance client portfolios back to their target allocation.

There are probably hundreds of quotes, articles and academic papers about the hazards of market timing. This is largely because all forms of active management all boil down to some form of market timing. It turns out, however, everything an investor needs to know about market timing is well summed up by Charles Ellis who simply says: “Market timing is a wicked idea. Don’t try it—ever.”

Those who sold out of their portfolios during the downturn may even find the term “wicked” to be an understatement.

There’s an old adage that goes something like “when you lose, don’t lose the lesson.” The lessons to be gained here are simple enough to retain, but challenging to put into practice during market volatility:

  • crystal balls don’t work
  • the market price is always the best estimate of a fair price
  • the market always carries a positive expected return—whether you realize it or not
  • risk (volatility of returns) is the reason why investors can expect a return (compensation)
  • anyone who tells you they can reliably predict future stock movement is lying to you, to himself, or to both

Five years ago, when these market truths were challenged, those who put them into practice and stayed the course can look at the rise of the markets with great satisfaction in themselves, their convictions, capitalism, and their advisors.

For those who regret they let themselves or their advisor talk them out of the markets—let us help you learn how the markets really work. Let us help you learn the lesson, and stay the course. Call us today at 888-643-3133.