Market Pundits Often Get It Wrong

Market Pundits Often Get It Wrong

With the US markets breaching their all-time highs, I have had more clients ask me when the correction is coming.  We’ve been through two crashes in the last 13 years, and the investor psyche is fragile.  In both instances, markets have reached this level investors have been slapped with 50% + losses.  It is not hard to understand why they might be skittish.  But the idea that we can time the peaks and valleys of this market is not a profitable response.  Jim Parker from Dimensional Fund Advisors has a great article on the perils of trying to time this market, using real-life examples of some heavy hitters who struggled during this period:

Trying to time your entry point to the market correctly is never easy. Just ask the experts.

In early February, strategists at a global investment bank were becoming alarmed at political events in Europe, the sequestration “crisis” in the US Congress, and what they saw as an unseemly rush into equities.

The word went out to their clients to put a tactical alert on stock investing for the next one to six months.

A month later, however, the bank strategists1 decided to reverse course. The problems in Europe, they now discerned, were not systemic, and the likelihood was that continuing easy monetary policy would support investor sentiment globally.

As a result, the experts told clients to cautiously re-enter the market over several months.

That’s a shame for the clients because ng, the Global MSCI was up by 8.6% in US dollar terms this calendar  at time of writingyear. The US S&P 500 was up 10.7%, the FTSE-100 9.9%, and Australia’s S&P/ASX 300 10.7% in local currency terms.

The investment bank was not alone in changing its view.

In December 2011, the veteran US newsletter writer Richard Russell, author of the Dow Theory Letters, told his clients in unequivocal terms to “get out of stocks.”

“I believe we’re going to see a brutal stock market that will shock the Fed and the bulls and the public—and all who insist on remaining in this bear market,” he said.2

But 15 months later, Russell has changed his tune, telling his clients to buy stocks after a rally that has taken the broad US market to more than double the levels prevailing at its bottom in March 2009.

“Yes, I know that this market is uncorrected during its long rise from 2009 low, and I know that there are risks in buying an uncorrected advance that is becoming uncomfortably long in the tooth, but my suggestion is that my subscribers should take a chance (after all, Columbus took a chance),” Russell said in March 2013.3

This sort of commentary isn’t just happening in the US.

In Australia, one of the most recognized market gurus, writer Alan Kohler, issued an ominous warning to his subscribers in a regular note in December 2011:

“The conditions are in place for a panic sell-off,” he said. “It is not certain that it will happen … but the risk is now such that you must take action. I will be significantly reducing my already reduced exposure to equities, possibly to zero.”4

Explaining his mistake later, Kohler said he had not foreseen the extent to which central banks would continue to pump cheap money into the financial system.

That’s all very well. But the fact is anyone who followed his advice and went to term deposits missed a rally in the Australian share market of more than 20%.

The idea that we should be trying to predict the direction of the market over the course of the next several months is silly for most investors.  When we have time frames of 10, 20, and 30+ years, we should be thinking about what will give us the highest probability of success over this period.  Sometimes many of us feel like we should be “doing something,” but in fact, too much activity or tinkering with a portfolio can be detrimental to your wealth.  Our advice to clients has always been to tune out the pundits who tell you what the market is going to do in the next few months.  Instead, develop a long-term plan that gives you the highest probability to reach your goals, then stick with it.

Information contained herein has been obtained from sources considered reliable, but its accuracy and completeness are not guaranteed. It is not intended as the primary basis for financial planning or investment decisions and should not be construed as advice meeting the particular investment needs of any investor. This material has been prepared for information purposes only and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Past performance is no guarantee of future results.

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