Market timing

[gmarine]

There have been a few recent threads about the stock market so I thought I would share some interesting facts I have read recently about timing the market.

We all know the stock market is risky. Thats a good thing because without risk stocks wouldnt provide the long term rewards.

Average annual returns 1926-2007. Its risk versus reward.

Large Cap Stocks 10.4% with the worst year being down 43%
Long Term Treasuries 5.5% with the worst year being 9.2%
30 Day Treasuries 3.7% worst year being 0% return

A 2005 study by Morningstar showed that in all 17 mutual fund categories that Morningstar tracks, the returns actually earned by investors was lower than the average annual return each fund.

The reason? Market timing. Investors who chase performance and buy at the wrong time and investors who sell thinking they are going to avoid losses.

A great quote by the great former Fidelity Magellan fund manager Peter Lynch: " Far more money has been lost by investors in preparing for corrections or anticipating corrections than has been lost in the corrections themselves".

The economy is terrible, housing is in shambles and the stock market is way down. Many stocks are down because of panic, not because of fundamentals. Now is the time to jump back in slowly and selectively. Dollar cost averaging into the market over the next few months may be a great opportunity. There are many bargains out there for anyone who has time and tolerance for risk.

 

[dioxide45]

The economy is terrible, housing is in shambles and the stock market is way down. Many stocks are down because of panic, not because of fundamentals. Now is the time to jump back in slowly and selectively. Dollar cost averaging into the market over the next few months may be a great opportunity. There are many bargains out there for anyone who has time and tolerance for risk.

The thing is that dollar cost averaging doesn't work when buying in over a couple month period. Dollar cost averaging is a long term strategy over many many years. If you buy in, spread over the next couple of months and never buy in again, you have not captured the power of dollar cost averaging, you are just trying to time the market.

 

[gmarine]

The thing is that dollar cost averaging doesn't work when buying in over a couple month period. Dollar cost averaging is a long term strategy over many many years. If you buy in, spread over the next couple of months and never buy in again, you have not captured the power of dollar cost averaging, you are just trying to time the market.

I should have been more clear. What I meant to say was to
START dollar cost averaging over the next few months.

 

[caribbeansun]

More on that market timing subject - I received this from my broker early this week:

We are presently looking at some historical stats that will hopefully calm some investors in these very volatile and trying times. For example, over the past 35 years, there are 9 years where the total composite return of the TSX was negative ranging from -0.2% to -25.9%. There were 26 years where the return was positive ranging from 5.5% to 44.8%. The average return over the 35 years was 10.7%. If we then consider 2 year running averages, there were six 2-year periods where the annual rate of return was negative over those 2 years ranging from -1.4% to - 12.5%. However, if we look at 5-year running averages, there were no 5-year periods where the average total return of the TSX was negative. The 5-year running averages range from 2.5% per annum to 25.3% per annum.

If you look at the average 5-year return in 2002, it was 2.5%. Over the past 10 years, the 5 year running average annual return of the TSX ranges from 2.5% in 2002 to 18.5% in 2007. If we consider 10 year running averages, the numbers are even more reassuring. We are presently working on putting together this analysis over a much longer period (i.e. 60 - 80 years) and looking at both CDN and US markets.

The point is, that based upon the 35 -ear analysis of the TSX, 9 individual years of negative returns is about 25%, meaning that on average, we will have one of every four years producing a negative return. If we are in a negative year and we have absorbed most of that loss already, moving our of equities at this point may have a negative impact on an investor's total return over his/her investment horizon.
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The potential flaw in this logic is that they assume we've absorbed most of the losses already - only time will tell about that. Personally, I fell that brokers that didn't hedge any portion of a portfolio for this have done a disservice to their clients. Sitting back watching the free fall saying - "it'll come back" seems rather helpless to me.

 

[Emily]

I respect the OP's post but to quote every broker for the last 50 years "past performance is not an indicator of future returns". I understand the buy and hold philosophy well and agree that for many years it worked within the US framework but the size and influence on the markets has changed. I believe the change to global markets and global economy requires a different strategy.

I'm not claiming to have the answer but money riding in this market that swings 200 to 900 points a day is more like a turn at the roulette wheel in vegas rather than sound investments made by our "buy and hold" parents.

jmo

 

[AwayWeGo]

Playing The Market.

I know a guy who actually plays the market -- doesn't even call it investing, just blithely admits he's gambling.

He says sometimes he's up by 30 grand or so, sometimes down about the same.

He likes to sell stock short when he thinks its share prices are about to head south -- sells borrowed shares at today's prices, buys'm back at depressed prices later when it's time to return the shorted stock, & pockets the difference.

It's completely legal & above board, he says.

He said he cleared $75,000 the week before last on short sales, & cleared the same amount last week the same way. Then, he said, he lost $93,000 in other transactions.

Seems to me the guy is racking up hefty brokerage fees for the commissions he has to pay on all his various stock transactions, win or lose mox nix.

As for me I think I agree with Mark Twain -- Put All Your Eggs In 1 Basket & Watch That Basket.

-- Alan Cole, McLean (Fairfax County), Virginia, USA.​

 

[caribbeansun]

Of course short selling is legal.

On-line brokerage costs are nominal compared to the past and really don't impact on trade values to the extent they used to, not to mention that with volume you get discounted rates off the already lower rates.

The volatility and the magnitude of the swings we have seen in the past month is truly stunning.