Quote - time the market?

"Don't try to time the market. It's very, very difficult to do. There may be a couple of people in the world who can do it, but if there are they're not telling you."
- Ben Bernanke

Quote - Socialism

"The problem with socialism is that eventually you run out of other people's money"
- Margaret Thatcher

Is Buy and Hold Dead? Part III

Part I - May 13, 2009
Part II - July 6, 2009

Can you name the 10 most successful market-timers? No, how about the top 5? One?

I can't and it's not for lack of searching. Market timing is a very attractive idea that has seen quite a resurgence due to this dreadful bear market. It's attractive and impossible.

As proof, I offer Joseph Granville who was considered to be the market guru of the 1980s. He made some very impressive market timing calls and at one point could actually move the market in one direction or another based on what he said that day. Joe sold his market timing advice via a newsletter.

Mark Hulbert publishes the well researched, Hulbert Financial Digest where he monitors the performance of 100s of investment newsletters. I've used the Digest to get an independent assessment of a newsletter's quality and I respect the data Mark provides.

Go read what Wikipedia has to say about Joseph Granville. Hulbert Digest data is mentioned there.
http://en.wikipedia.org/wiki/Joseph_Granville

Well -20% per year is so awful that it is not to be believed. So I looked it up in the Digest for myself and Granville's Traders Portfolio achieved -0.2% per year since mid 1980 (still awful). If you invested in the Wilshire 5000 (all domestic stocks) you earned +10.3% per year.

Starting with $1,000,000 29 years ago and compounding it at -0.2% annually, you end up with $943,595. In contrast, the Wilshire 5000 investment is worth $17,166,820.

You would think at least the Granville portfolio was less risky than the Wilshire 5000, but no, Hulbert says the Trader's Portfolio was 5% more risky.

Conclusions:
1) Market timing doesn't work and never will.
2) The only people who made money on the Trader's Portfolio were the people selling the newsletter!

P. S. if you compound $1M at -20% for 20 years you have all of $1,547 left.

Thanks to Harold Evensky and Financial Advisor Magazine for the idea for this article.

Why oh Why Do I Invest in Stocks?

Cick the chart for a better view.

This is why we invest in stocks. If government bonds seem "safe", then using "unsafe" large-cap stocks more than tripled the return after inflation. Using small-cap stocks caused the return to more than quadruple.

This makes a lot of sense. The returns from bonds are much more stable (reliable) than the returns from stocks. The market assigns returns based on an estimate of reliability. Bonds are more "reliable" therefore they must return less than the "unreliable" stocks.

To achieve their financial planning goals, most of my clients need returns that are greater than what can be provided by bonds or cash or CDs, etc. By mixing in an appropriate amount of stocks with the bonds, we hope to achieve the required return.

The disadvantage to using stocks is volatility and this can be very painful at times.

Right now we are in an extreme bear market that illustrated quite well that the pain of owning stocks is watching them go down, down, down. However, for most of my clients, cheaper stock prices are a good thing because they can buy more stocks at lower prices. For those nearer retirement, an adjustment to more bonds and less stocks may be an answer although the planning is complicated by spending patterns, Social Security, other sources of income, and perhaps the need to leave a bequest for the next generation.

Data Source: Morningstar 2008. Thanks to Nick Murray in his book Behavior Investment Counseling for the idea for this article.

The Economy Has Hit Bottom

I like this article because it concentrates on fundamental truths -- economies do recover, sometimes with surprising gusto.

From the Wall Street Journal, 7-23-09 by Alan S. Blinder

"How’s the economy, you ask? I have the proverbial good news and bad news, but in this case, they’re exactly the same: The U.S. economy appears to be hitting bottom.
First, the good news. Right now, it looks like second-quarter GDP growth will come in only slightly negative, and third-quarter growth will finally turn positive. Compared to the catastrophic decline we recently experienced—with GDP dropping at roughly a 6% annual rate in the fourth quarter of last year and the first quarter of this year—that would be a gigantic improvement.

Furthermore, there is a reasonable chance—not a certainty, mind you, but a reasonable chance—that the second half of 2009 will surprise us on the upside. (Can anyone remember what an upside surprise feels like?) Three-percent growth is eminently doable. Four percent is even possible. Surprised? How, with all our economic travails, could we possibly mount such a boom? The answer is that this seemingly high growth scenario isn’t a boom at all. Rather, it follows directly from the arithmetic of hitting bottom."

For the entire article: http://tinyurl.com/msbhcj The link works only for a few days. If you can't access the article, let me know and I will try to gain access for another short period. rich.chambersABC@gmail.com Spam prevention: Remove the ABC from the email address.