Devil's Advocate 

Time The Stock Market!

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This is a Devil's Advocate post.

Screw the experts, screw the planners, screw all those smart people who told you that you shouldn’t the time the market. Timing the market is the name of the game! Why wouldn’t you use all of the available information to your advantage? Why buy shares each and every month if the sky is falling? While I respect the thinking that the averages work out over the long run, reality is that no one lives in the long run and you can’t keep throwing good money after bad. If something is a bad investment, the experts say forget the sunk cost and cut loose. So if the stock market is a bad investment, why do they argue that you should keep investing when the smart money says you should take a break?

Before I argue why timing the market is smarter than buying like a mindless robot, let’s blow away the concept of an expert. Look at the dot-com boom, that was fueled by experts. The subsequent bust was nowhere on their radar. Experts do this day in and day out, you can’t tell me they don’t notice things going south. That means either you don’t want you to know because you’ll stop buying, which means they can’t be trusted, or they can’t tell, which means they’re incompetant. Or, the stock market is a bewildering creature that simply cannot be predicted (this is what I believe).

How about the housing boom? That was, in part, fueled by smart people figuring out they could collateralize garbage loans into safer loans so they could get their money out and lend some more. Boom, now the Feds have to assume control over Freddie Mac and Fannie Mae in order to calm the entire financial system and prevent a full-blown catastrophe.

Stock market and financial experts are like professional blackjack players. Sure, you can tweak the odds a little in your favor, but no one can see the future.

Use All Available Information

When people tell you not to “time the market,” they often mean that you should just buy slow and steady without any regard to what’s happening on the news. If you bought into an S&P 500 index fund anytime in the last few months, you had a stake in Freddie Mac and Fannie Mae (both of which were delisted last week because their market cap fell under the requirements). You bought into two companies (or “government sponsored entities”) that were in the middle of a housing crisis that we are basically chin deep in. There was talk that the companies would be taken over by the government, a move that would render their common stock shares worthless. If you bought into that index fund on a schedule, you bought into what appeared to be a sinking ship.

Experts would say to ignore that market news and just buy along as usual. I say that, in general, that should be the case but you have to use your brain here. We’re not in a scenario where some parts of the economy are doing well and others aren’t, we’re in a scenario where consumer spending is slowing and there are significant headwinds in the financial markets. Why not just take a break?

It’s Not The Only Game In Town

The stock market is one of the easiest ways to invest your money but it’s not the only way. You can take your money and invest it into a small business. You can go another easy route and buy some commodities like precious medals. You can buy art or horses or real estate. You could invest it in driving around to garage sales and looking for underpriced gems you can sell on eBay. The stock market isn’t the only thing you can invest in, consider other options. The more creative you get, the greater the potential gains.

Regular Contributions = Regular Commissions

Stack of MoneyThere is one thing for certain every time you make a trade, the broker is going to take a cut. Whether it’s a load on a mutual fund, administrative fees, or a straight up commission – brokers make money on the action. When you make an investment decision, your choice might win or it might lose; brokers are fortunate, they always win. If people stop making contributions and stop buying stocks, brokers earn fewer commissions. Financial experts have a vested interest in telling you stay the course and that things will turn around (and they will, it’s just a matter of when).

Rule #1: Don’t Lose Money

At the end of the day, remember that rule #1 is that you shouldn’t lose money. Money that you don’t put into the stock market is money that you cannot lose. Put it into a high yield savings account (WaMu has a 5% APY 12-month CD No more! It’s now like 4% for 8 months.) so you don’t let inflation erode your purchasing power but staying on the sideline guarantees you don’t lose money. You may not earn a ton but you’re not going to lose a penny.

Timing the market is risky, but it’s certainly not as risky as blindly following “expert” advice.

(Photo: thecaucas, dsevilla)

{ 12 comments, please add your thoughts now! }

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12 Responses to “Time The Stock Market!”

  1. tom says:

    oh no! The 5.00% CD offer is DONE!!! It’s been replaced with a 8-mo, 4.25% CD offer!

  2. Rick Morley says:

    I know this is a DA post, but I can agree with it, under certain circumstances. In order to time the market, you have to have a lot of knowledge. You have to spend a lot of time researching companies (or even the market in general). You have to have a lot of knowledge about how technical trading works (reading charts, looking for patterns etc.). If you can do all these, you’ll likely be able to outperform the market.

    That said, look at Lehman brothers and Merrill Lynch. If even they were not able to successfully time the market, why do we think we can?

    Just a point to ponder…

  3. Dave says:

    I totally agree! I can’t wait to time the market, just as soon as I get my crystal ball back from the shop….

    Sure it is easy to say in hindsight that it was stupid to buy S&P 500 shares 3 months ago. But at the time there were no guarantees that the market wasn’t going to start shooting up. If you “knew” that the market was going down, then shouldn’t you be advocating shorting SPY or Fannie Mae/Freddie Mac? And advocating that people buy art or horses is really not a good alternative. I have to say, one of my least favorite posts so far.

  4. Is the WAMU recommendation also Devil’s Advocacy? There are banks out there that are not teetering on the brink.

  5. Jeff says:

    Well, assuming buy low/sell dear, this market timing thing means buying season could be about to open!

    BTW, the fact that this is a Devil’s Advocate post doesn’t show up in Google Reader.

  6. jim says:

    Hmmm I have to figure out how to show it’s a Devil’s Advocate post in Google Reader…

  7. MFJ says:

    >Hmmm I have to figure out how to show it’s a Devil’s Advocate post in Google Reader…

    I agree I thought you were off your rocker for a second until I came to the page and sa it was a DA post 🙂

  8. Hanstaruna says:

    in my view, to hear expert opinions is good but don’t follow them blindly. It’s because they have different interest than ours.

  9. Renoster says:

    Timing the market is great as long as you have an idea in what direction it is heading. In most instances, however, it is almost impossible to tell. A bear market precedes a recession months in advance. The same is also true about bull markets – the markets recover probably a good six months before the economy does.
    If you miss the best market days your portfolio returns will suffer. On the flip side, if you only miss the worst days you’ll be a very successful investor. Personally, I don’t pretend to know what the markets will do. For me it’s important to have the right investment allocation based on my goals and objectives.

  10. Gaurav here…Interesting post…I worked as a financial advisor and experience has shown that timing the market really doesn’t get you ahead but long-term planning with optimizing the Alpha in your portfolio based on your risk tolerance does.

    Timing the market only works for the 1% of the elite wealthy population who have access to inside information, extremely readily. It doesn’t work for you and I and the other 99% of Americans who don’t run in elite circles.

    Basically, we end up buying high in an bull market and selling low in a bear market majority of the time when we try to time the market.

  11. Dana says:

    In the book Your Money Or Your Life, Vicki Robin and Joe Dominguez advocate for people to invest in thirty-year Treasury bonds. It’s the safest investment out there; if we ever get to the point that nobody trusts T-bonds, the country will be in such a mess that nobody’s going to care anyhow. The returns are decentish right now; last I heard they were over five percent. They’ve been almost twice that amount in the past. And the bonds are totally liquid so if you needed to sell some because you had an emergency, you could without penalty. Also, these days the Treasury Department is allowing investors to buy them in $100 increments. That’s a new thing as of (I think) this past March.

    The number one argument against doing it is inflation. Dominguez made his living as a Wall Street investor before he retired–at age thirty. He was aware of inflation as a hazard but he argued that consciousness increases faster than inflation, meaning that if you use your brain and look around yourself at the possibilities, you can find ways to save money on purchases faster than the prices go up.

    One thing the “OMG inflation!” folks always, ALWAYS fail to point out is that the indicators we use to determine if inflation is happening, all assume that we buy things like cars, refrigerators, stereos, and televisions every year and that we buy them brand-new. Obviously that is not true. Also, prices don’t always go up. As we’ve seen with computer technology, they often drop as the means of production becomes more efficient or the product becomes more mainstream.

    And another reason Dominguez suggested T-bonds is they’re easy. You go buy one and that’s it. At most you have to educate yourself about things like bond yield before going in, but the amount of time you are going to spend doing that will be a lot less than trying to learn to time the market or learn which stock-market-related investments are safer.

    I’m not above investing in the stock market, mind you. But I think when I do it it’ll be with money I can afford to throw away. I know that as long as you hang onto a share and the corporation isn’t bought and doesn’t go out of business, you’re good to go, but I don’t want to see a crash happen right before I retire and be left with nothing. Treasury bonds are always in $100 increments and I’ll get that back when the bond matures. The only thing that will change is the interest rate, and for all I know, that might be greater when it’s time to reinvest. *shrug*

  12. Rick Morley says:

    Dana, the yield on 30-year treasuries right now is only 4.14%. And yes, it’s been higher in the past, but only when inflation has been higher.

    You’re right that treasuries have a 0% risk of losing your money. But the yield is low enough to match that risk. And the yield is barely above (or in many people’s opinions, significantly below) the rate of inflation. And yes, inflation does take into account the dropping prices of electronics.

    Still, if you live is such fear that you can’t lose a single penny, maybe treasuries are for you. But I would pose there is also another risk — a risk of not having enough money to retire when you want to. If you only save at 4% returns, your money won’t compound very quickly, and you may not have enough money to retire. You will have to save a much larger amount in order to have enough.

    For me, I invest in the stock market for two reasons:
    1. I don’t have such an emotional attachment to money that I live in fear of losing even a single penny.
    2. The 8% returns afforded by the stock market in the long run will better help me to have enough to retire when I want to.

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