Small investors are sometimes intimidated by Wall Street's ways. They read about speculators buying stocks for quick short-term gains. They see big institutional investors using huge mainframe computers to get buy and sell signals. They hear about technical analysts timing market fluctuations to the hour. Isn't market timing what the famous adage "Buy low, sell high" is all about?
All these people seem to know the exact moment to buy and the exact moment to sell. Shouldn't average investors, so often accused of buying at the top and selling at the bottom, try some market timing of their own?
The answer is No. "Buy low, sell high" is the goal with individual stocks, but it is dangerous advice when dealing with the stock market as a whole. The market is too complex. Half rational, half nutty, no one ever knows exactly what it will do next -- least of all you.
Though you may be feeling jittery, though prices may seem like they are bound to fall, though you heard someone say they heard someone say it was time to make some kind of move -- resist the temptation. Chances are that if you are swept up in a conviction about where the market is going, several million other investors feel the same way.
Not even stock market masterminds succeed at market timing. A few asset managers try, and occasionally they enjoy great success, and stories about them appear in the press. Over the long term, however, fund managers relying primarily on market timing have fared poorly.
Several years ago, John Bogle, then chairman of the Vanguard Group, said: "In 30 years in this business, I do not know anybody who has timed the market successfully and consistently, nor anybody who knows anybody who has done it successfully and consistently. Indeed, my impression is that trying to do market timing is likely, not only not to add value to your investment program, but to be counter-productive."
It gets worse: a recent article in AAII Journal by two professors of finance suggest that market timing is inheremtly dangerous because it requires investors to be out of the market, and the perils of being out of the market are so dangerous that investors should plan to be in at all times. "The deck is stacked against you," they warn timers. If you're a long-term investor, there's *really no time you can afford to be out of the market."
As an alternative to guessing which way the market is heading, consider these tactics:
Dollar cost averaging. By investing a set amount every month, you avoid market highs and lows, and thus overcome the temptation to sell when prices drop, and to overbuy when prices -- and market psychology -- are up. Dollar cost averaging helps you stop worrying and start seeing down markets as opportunities -- just like the large investors do.
Why does dollar cost averaging work? Because history shows us that while the stock market fluctuates a great deal in the short term, its long-term trend is gradually upward. While large investors with their resources may successfully time short-term fluctuations, dollar cost averaging allows the smaller investor, with fewer resources, to ignore market timing altogether and simply enjoy the gradual growth of his investments.
Practice asset allocation. Decide what portions of your savings should be in stocks, what portion in bonds, in cash, etc. Maintaining a constant ratio, which you determine based on your comfort level, and how soon you may need your money, insulates you from market bumps, and keeps you on track.
Laddering. The bond market tempts timers, too. Buying bonds with differing maturities, or "laddering," helps you avoid the worst price fluctuations, while minimizing reinvestment shock if a given bond is called.
One sensible protection, of course, is to invest in no-load mutual funds with proven track records. A good portfolio manager knows which sectors are cooling,and which ones are heating up. The number of issues in the portfolio, the number of sectors and industries represented, and the fundamental quality of the companies, taken together, will outperform market timing any day.
So the next time you have the itch to move your money into or out of the market, count to ten, or take a long walk. If your investment horizons are long-term, you are positioned to withstand the short-term bumps in the market. Keep your money where it works for you, with the winds of risk and opportunity blowing in your face. {
Michael Finley is a St. Paul-based writer specializing in issues of management, technology, and quality.