COLUMN-Four reasons to ignore market timing and focus on happiness

Mon Aug 11, 2014 11:55am EDT

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(The opinions expressed here are those of the author, a columnist for Reuters.)

By John Wasik

CHICAGO Aug 11 (Reuters) - With global angst going up several degrees, there are myriad reasons to feel nervous about stocks. But that shouldn't compel you into timing the market - focus on your prosperity and happiness instead.

As University of Michigan researchers Justin Wolfers and Betsey Stevenson have discovered in a study on economics and happiness, there's a strong link between higher incomes and self-reported levels of life satisfaction and happiness. (Link to study: bit.ly/1cg1Mj6)

While money is certainly not the only ingredient for a happy and prosperous life, it can certainly smooth out a lot of the rough edges.

Here are four reminders for why you should not let market anxiety eat you up:

1. Stocks follow cycles, but most analysts are notoriously awful at predicting when they begin and end.

Look at the year 1982, when the S&P 500 ended a 63 percent down cycle that began in 1968 at the height of the Vietnam War and widespread social unrest. In the early 1980s, Ronald Reagan was president, the Federal Reserve was fiercely battling inflation and few had stocks in their retirement plans.

In the bull market that began that year, stocks rose some 666 percent until the height of the dot-com bubble in 2000. Who was optimistic in 1982 to the point of predicting an 18-year bull run?

Compare that to what's happening now: Although we're still in a "cheap money" economy thanks to the U.S. Federal Reserve's stimulus program and low interest rates, this period won't last forever. So you should focus on maintaining your nest egg and reducing stock and bond market risk now.

2. There is no definitive "trigger" for cycles to shift.

Market historians often want to pinpoint what single factor tells investors to buy or sell. The reasons are often obscure and based on "animal spirits," or irrational, unpredictable, herd behavior.

High interest rates and energy prices, loss of optimism, bank failures and inflation are usually bearish, but not always. From 1921 to 1929, stocks rose nearly 400 percent, followed by the Great Depression, although there was a Wall Street rebound of 266 percent from 1932 to 1937.

Scholars are still debating what happened during that period. Few were able to time the market successfully during that difficult time.

3. Sometimes short-term cycles are costly distractions.

The second years in presidential terms are typically sluggish, with stocks in the third quarter averaging a 0.3 percent return, according to Standard and Poor's.

But let's say you thought the market was getting bearish and pulled money out of stocks this summer through the end of the year. Then you'd miss fourth-quarter rebounds that average from 2 percent to 3 percent during that period. Again, you may not do yourself any favors with a gut-based market timing strategy.

4. The long-term view is bullish.

Going back to 1926, every huge stock decline has been eventually followed by an even-bigger recovery, according to Leuthold Weeden Research. That includes all wars, market crashes and everything in between. Can you ever tell when it's "safe" to be in the market? Those that pretend to know are guessing.

The moral of this story? If you're investing long term, want to beat inflation and build wealth over time, stocks make sense.

But focus on a mix between stocks, bonds, real estate and other assets that allows you to sleep at night. Your objective is not to figure out when stocks are heading into a bear market, but building enough of a nest egg and income stream to ensure your happiness. (Follow us @ReutersMoney or here; Editing by Beth Pinsker and Jeffrey Benkoe)

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