By John Wasik
CHICAGO, March 15 Will Rogers, the great cowboy
and humorist from Oklahoma, entertained America during the
darkest days of the Great Depression. His investing advice? "The
best way to make money is to buy a stock. Then, when it goes up,
sell it. If it's not going to go up, don't buy it."
Today's individual investors still seem to be playing this
fool's game. Despite overwhelming academic evidence to the
contrary, most investors think that they can time the market.
But in reality, they are often just following herd instincts
or their own irrational impulses and getting trampled. While
being out of the market when it is tanking is no sin, not being
invested during a rally carries a steep price.
For the last two decades, the S&P 500 index returned
an annualized 8.2 percent but the average return of U.S. mutual
fund investors was an annualized 4.25 percent, according to the
investment research firm Dalbar.
Why the disparity? Investors like to bail to cash and bonds
when the market shows volatility, which has been a troublesome
gremlin in recent years. Nervous market-timing investors then
wait too long to get back into stocks.
Yet the waiting game is costly. Say you had a $100,000
portfolio and earned 4.25 percent annually. At the end of 20
years, you would have a lump sum of $229,891. Bump the return up
to 8.2 percent and your kitty is more than double - $483,666.
Keep in mind that these are nominal pretax earnings that do not
include investment expenses, inflation adjustment or additional
contributions. Your final tally could be higher or lower
depending on whether you are adding money or investing in
low-cost index funds.
What if you are only now re-entering the market from a long
hiatus you began in 2008? This is what you have missed just in
the last year: The S&P Mid-cap stock index is up about 8.3
percent year-to-date through Feb. 28; the S&P Small-cap index
has climbed 7.3 percent and the S&P 500 (large cap) index has
risen 6.6 percent.
As for bond indexes, the Barclays US Aggregate Index, a
proxy for the U.S. bond market, is down 0.20 percent and the
Barclays US Corporate Credit Index is off 0.18 percent.
That means if you had $100,000 invested in the U.S. bond
index for the last 12 months, you would have lost $200. But if
you were in an S&P 500 fund like SPDR S&P 500 Index fund
, which gained 6.46 percent through Feb. 27, you would
Unless you were happy with a loss, or low single-digit
yields in government bonds, or insured savings accounts that
have not beaten inflation, your caution was overplayed.
Of course, none of these recent returns are guaranteed to
continue, but if even a sluggish rebound is gaining momentum,
you could be missing some gains.
There are several ways to rationally attack your fear of
flying back into the market:
1. Adopt a rational short-term outlook
By short term, I mean year-to-year, not day-to-day. Stop
focusing on daily or weekly headlines and look at the big
picture. Barring any government-induced slowdown in federal
spending - still an unresolved issue - the economy is benefiting
from a rising tide and not a receding one. That is bullish for
2. Ease into the market on a regular basis
If you decide that you can afford to be in stocks and can
stomach the risk, commit fixed amounts every month. You can do
this either through your regular 401(k) contributions or
automatic debits into individual retirement accounts, mutual
funds or single stocks you own. Companies that offer
dividend-reinvestment plans give you a bonus: Buying new shares
3. Stop timing altogether
The all-in or all-out approach is usually a fool's game. It
is nearly impossible to predict market turns. It is perfectly
reasonable to combine stocks with bonds - your bond portion
should roughly match your age - but constantly shifting between
the two is costly. Decide on your asset allocation once a year
and review it 12 months later. If you feel that you took too
much risk, lower your stock holdings.
There is no harm in being cautious on wild-card scenarios.
Remember that there still could be some dust-ups in Washington
and drastic spending cutbacks could slow economic growth. And it
is tough to predict what is going to happen overseas.
But if you line up your portfolio according to what is
likely to occur - given no catastrophes - you will at least
avoid buying into a rally late and selling at the wrong time.
Sometimes being static is a virtue.