Last week the Dow rose 7.3% last week amid earnings reports from many companies, as reported in the Wall Street Journal (http://online.wsj.com/article/SB124782681174757379.html). For most companies, it's not like the reports were necessarily good. It was that the news was not as bad as expected. This rapid rise in the market occurred despite poor economic news, including rising unemployment now predicted to go north of 10%.
To many investors, this seems counter-intuitive: poor economic news and declining earnings reports compared to the same time last year yet the market goes up markedly. How come? It's quite simple actually. The market looks forward and reacts to new and unknowable information. So even though the news was bad, much of it was not as bad as expected. Thus the new information positively changed market expectations and prices adjusted upward.
Unless you can predict the future, as investors we must stay invested through good times and bad to ensure we experience the positive results the market historically provides. Several studies show how the market provides its returns in short-bursts, as it did last week. (Click here to see the impact of missing the 12 best months from 1979-2008 http://www.truewealthdesign.com/content.cfm?ContentID=1564).
Alternatively, some investors try a market timing approach. Market timing is an attempt to forecast the market’s direction, pulling money out in anticipation of a downturn and reinvesting when it seems likely that prices will move higher. The events that move markets are virtually unpredictable, so market timing is essentially trying to predict the future--crystal ball anyone?
While a market timer may get lucky in the short run, numerous academic studies have showed that market timers yield results significantly lower than a passive buy-and-hold type investor. The markets run up last week amid poor economic news is an example of how market timing can severely hurt investor's returns. Another example can be seen in investors who fled stocks in October after a painful eight-day, 23% slide in the S&P 500, because on October 13, these investors may have also missed a major 12% one-day gain. This illustrates the point that episodes of falling prices can be clustered with episodes of rising prices.
So while it may be unsettling to some to have to endure the downs to experience the ups, there is no other way to ensure that market returns will be realized. If an investor cannot maintain his or her allocation during negative markets, the portfolio should be adjusted more conservatively and done so permanently. Trying to get back in when the news is good will likely lead to disappointment and under performance.
For a short video to expand on this subject, click here to hear Professor Ken French discuss whether Stockholders Should Sit This One Out.
http://www.dimensional.com/famafrench/2009/07/should-stockholders-sit-this-one-out.html#more
To Your Prosperity ~ Kevin Kroskey
To many investors, this seems counter-intuitive: poor economic news and declining earnings reports compared to the same time last year yet the market goes up markedly. How come? It's quite simple actually. The market looks forward and reacts to new and unknowable information. So even though the news was bad, much of it was not as bad as expected. Thus the new information positively changed market expectations and prices adjusted upward.
Unless you can predict the future, as investors we must stay invested through good times and bad to ensure we experience the positive results the market historically provides. Several studies show how the market provides its returns in short-bursts, as it did last week. (Click here to see the impact of missing the 12 best months from 1979-2008 http://www.truewealthdesign.com/content.cfm?ContentID=1564).
Alternatively, some investors try a market timing approach. Market timing is an attempt to forecast the market’s direction, pulling money out in anticipation of a downturn and reinvesting when it seems likely that prices will move higher. The events that move markets are virtually unpredictable, so market timing is essentially trying to predict the future--crystal ball anyone?
While a market timer may get lucky in the short run, numerous academic studies have showed that market timers yield results significantly lower than a passive buy-and-hold type investor. The markets run up last week amid poor economic news is an example of how market timing can severely hurt investor's returns. Another example can be seen in investors who fled stocks in October after a painful eight-day, 23% slide in the S&P 500, because on October 13, these investors may have also missed a major 12% one-day gain. This illustrates the point that episodes of falling prices can be clustered with episodes of rising prices.
So while it may be unsettling to some to have to endure the downs to experience the ups, there is no other way to ensure that market returns will be realized. If an investor cannot maintain his or her allocation during negative markets, the portfolio should be adjusted more conservatively and done so permanently. Trying to get back in when the news is good will likely lead to disappointment and under performance.
For a short video to expand on this subject, click here to hear Professor Ken French discuss whether Stockholders Should Sit This One Out.
http://www.dimensional.com/famafrench/2009/07/should-stockholders-sit-this-one-out.html#more
To Your Prosperity ~ Kevin Kroskey