Feb 22, 2008

Motley Fool on the futility of market timing

An aside to all of this optimism
It should be noted that stocks dropped substantially in 2000 leading up to the recession -- just as they've dropped of late. Those examples, however, just go to show how the stock market does not move in lockstep with economic realties. Instead, it's an imperfect prediction machine with millions of analysts, institutions, and individuals trying to incorporate the information they know into daily trading decisions.

All that dynamism makes the market impossible to time, and if you're only starting to worry about recession as we may or may not be entering one, you are way late to the game. To get ahead of the curve, you should start thinking about buying and holding for the long term.
Don't just take our word for it, though. There's also brand-new research from IESE Business School professor Javier Estrada.

Javier who?
Mr. Estrada's recent paper "Black Swans and Market Timing: How Not to Generate Alpha" is one of the most persuasive cases I've read for a disciplined buy-to-hold investment philosophy.

Estrada studied 15 major global stock markets for periods ranging from 31 to 79 years, with the full data encompassing more than 160,000 trading days. What he found is "less than 0.1% of the days considered" actually matter to long-term returns, which means that "the odds against successful market timing are staggering."

So ... don't try to time the bottom
Now, this is a dangerous article to go on record with. If the market does tank this year, I'm going to get plenty of profanity-laced emails telling me that I'm "the real fool now" (seriously, you'd think people would be over that joke by now).

But even if we lose money this year (yes, I'm staying invested myself), we're all going to make a lot more money down the line not by trying in vain to time the market but by adding new money to great companies on a regular basis.

That way, rather than run from the lows, we'll double-down on them ... and supercharge our returns in the process.

~ Tim Hanson, "Will You Cash Out Before the Market Crashes?," The Motley Fool, February 15, 2008

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