Tuesday, December 8, 2009
Horoscopes, Fortune Cookies and Market Timing
Lately, I've been seeing a fair amount of discussion in financial periodicals and blogs about "Buy and Hold" versus "Market Timing". Flipping channels (sounds like I have a lot of free time these days) I invariably stumble on CNBC and Jim Cramer. I admit, he can be entertaining if you're in the mood for obnoxiously loud, fast talking and pompous middle aged balding guys. Like most of these guys who pitch their systems, strategies and books, they make you feel like a stooge if you adopt the boring, time tested asset allocation based upon your time horizon, risk tolerance level and tax circumstances. They imply that it's buy and hold...no matter what, without regard to rebalancing. But I don't buy their "this time it's different...buy and hold is dead" chants and neither should the vast majority of investors. These market guru-prognosticators make quite a few predictions. And the one in 20 times they're right, the gullible media and unknowing public lock onto it. Never mind the majority of their prior predictions being failures.
Smart investing is counter-intuitive. It's as much about managing our own human nature as it is all the factual data available today even to the most novice investor. The pro's in the business who have all the experience, market data and resources behind them cannot beat the market averages the vast majority of the time. Yet the one time someone hits a market prediction right, the media and herd of investors flock toward them. My father, who is as colorful as he is brilliant, has a fondness for horseracing. He says, "I'd rather put my money on the ponies than the stock market. At least when I lose my money, I get the excitement of watching them run around the track!" As it relates to market timing, I think he's right.
The greatest benefit of a financial planner/advisor is not to choose the #1 ranked investment for their clients, but to keep them from acting on irrational emotion...keep them from hurting themselves. The financial crisis hasn't changed human nature and it hasn't changed the time tested buy and hold-asset allocation strategy in favor of market timing. But like the horoscope and fortune cookie, on the rare occasion the market timers hit the mark, our human nature is to suspend reality. And the reality is, market timing is fools play.