Beyond Buy-and-Hold #11
By Rob Bennett
You?re arranging a family reunion. Hundreds of people will be invited to the picnic event and many will need to travel long distances to ge there. There will be lots of good food, a magician is being hired to entertain the children and there will be a band playing music for the adults. Expenses will be considerable.
You?ve scheduled the event for February 15 in New York. One family member observes that the odds are strong that it is going to be too cold in February for a picnic, but you pooh-pooh these concerns. ?No one can predict the weather with 100 percent accuracy,? you point out.
You add: ?If I were to look in an almanac and schedule the picnic for a time when the weather is likely to be more suitable, that would be timing the picnic. I know better than to put us all at that sort of risk. I?m going to take the prudent bet here, ignore the historical record of weather patterns in New York and hope for the best. Making predictions about this sort of thing is far, far too dangerous.?
How smart is ignoring history?
I am describing behavior as crazy as all get-out. But it?s no more crazy than the method by which Buy-and-Holders go about buying the stocks that they invest in to finance their retirements. The in thing today is to ignore the historical record showing that it never pays to buy stocks when they are priced as high as they have been priced from 1996 forward. But millions today insist that to let the historical data influence them would be timing the market and that that is a very dangerous thing to do.
Can we time the market with precision? We cannot.
Do we have any reasonable choice but to do the best we can with the tools available to us today? My answer is ?no.?
There?s some risk that goes with timing the market. But it?s not as if you avoid risk by failing to do so. Fail to time the market and you will be buying stocks without taking the price at which they are selling into account when doing so. That?s the most risky strategy of all, one that has never worked well for as far back as we have records of stock performance. The only thing more dangerous than market timing is failing to engage in market timing.
The greatest risk of all
Is it safe to ignore the mountain of evidence that it is going to be too cold for a picnic in New York in February? I say ?no.? And I also say that it is not at all safe to ignore the mountain of evidence showing that stocks are going to deliver poor long-term returns when priced as insanely high as they have been priced from 1996 forward.
There?s always a small chance that we will see a warm day in February and there?s always a small chance that someone who buys stocks when they are insanely overpriced will do okay. But this is the longest of long-shot bets; a friend of mine at a discussion board performed a standard deviation analysis to find out what the chances are that this will be the first time in history when valuations did not affect long-term returns and it showed that the odds are 1 in 740. This is not an approach that I would recommend that someone follow when investing his retirement money. Ignoring valuations (failing to time the market) is gambling and should be reserved for the small portion of your assets that you are happy to see get lost on wild bets. This sort of thing is best reserved for lottery ticket money.
The error that people are making is in failing to see that those who do not time the market are making a bet every bit as much as those who do time the market. Those who fail to time the market are betting that it will all turn out different this time, that this will be the first time in history when failing to time the market will work out for the long-term investor.
Could it happen? I don?t have a crystal ball. Anything could happen. But it?s risky as all get-out to stake your retirement money on a hope that things that have never happened before will play out well for you this time.
Picnics held in the snow often turn out to be not too much fun at all.
Rob Bennett recently addressed the question What Is a Bear Market and What Is a Bull Market? His bio is here.