Is it possible to time the market? Let us first define what “time the market” means. Timing the market involves moving large portions of one’s portfolio into or out of equities (stocks or equity mutual funds) in anticipation of perceived likely future price movements. So, for instance, if I believe the stock market is about to take a drastic fall, I sell all my stocks with the intent of eventually buying them back when prices are lower.
Henssler Financial does not advocate this style of investing. We instead recommend that funds needed within 10 years remain out of stocks, while funds not needed for 10 years or more remain in stocks. Some temporary adjustments need to be made occasionally based on market conditions, but this is our general rule.
Why does our firm avoid trying to move money into and out of stocks based on anything other than our “Ten Year Rule?” Quite simply, because none of us know what the stock market will do next in the short run.
And the very nature of the stock market suggests that if one tries to make large-scale moves based on short-term expectations, he or she will find it quite difficult to make money.
Let us look at why this is true. What causes a stock price to rise or fall? Mass judgments are made each second about whether the price of a stock is too high, too low, or just right. When enough people feel one way about a stock, they act by either buying or selling shares, thereby moving the price of the stock up or down. People are essentially using the same information to make their judgments—information in annual reports, stories in the news, a research report (that is also based on much the same information just mentioned) or a trusted opinion. This is what causes short-term price changes in stocks, or the market as a whole.
The “fear of war in the Middle East,” or the “optimism about the prospects for the Internet” are cited as the reason stocks rally or fall for weeks on end. The truth is these fears and hopes certainly affect stock prices, but the short-term moves are awfully difficult to predict. The day the most people feel that “hope” and allow it to convince them to purchase a stock is possibly the short-term peak for the market. On the other hand, the day that the most people are full of fear will likely always be the bottom of the market as well.
That is the primary problem with trying to time the market. In order for a market timer to make money, the decision to exit the market when a decline is expected must then eventually be followed by a decision to get back in. The argument goes, “I’ll wait until the market drops, then get back in.” The problem is that if the market drops, perceptions will also change—future prospects will look a little gloomier, and the decision to buy stocks will become more difficult.
That is why our belief is to eliminate attempting to time the market as a possibility, and stick to a long-term plan. If you do not need funds for 10 years, who really cares what the market does tomorrow, next week, next month, or even next year? The only two days the price of a stock really matters are the day you buy it, and the day you sell it. As long as long-term prospects for the U.S. economy remain positive, the U.S. equity market should remain positive as well. There will be bumps, some which last for years. Wealth is created more often with solid long-term plans, and not single correct guesses about which way the market will move next. For more information regarding this topic, please contact Henssler Financial at 770-429-9166 or [email protected].