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Don't Try to Outsmart the Market


Market returns do not always "make sense." Instead of attempting to time the market, investment decisions should be determined by the projected time horizon of the need of the funds, along with individual risk tolerance and objectives.

Two of the biggest mistakes I see clients make are:

1. Having their short-term money invested too aggressively

2. Having their long-term money invested too conservatively

The major factors that should come into play on whether or not to pull or place money in or out of the market are your projected time horizon of use for the funds, your objectives and your risk tolerance. If you need the money in the next year or two, your money does not belong in volatile equities.

However, if you know you do not need the money for 10-plus years (and you are comfortable with the risk), you owe it to yourself to strongly consider equities not only to keep up with inflation, but also to allow your money to work for you in a portfolio that has more significant growth potential that does not exceed your risk tolerance.

If someone could consistently and accurately time the market, you wouldn’t know that person because he or she would be retired on a private island somewhere. No matter how convincing a fact may be that might lead you to get in or get out of the market, there will always be other factors in play that have the potential to contradict your findings.

Market returns do not always “make sense.” One small announcement can make the market shift abruptly. Returns can come both from societal mass behavior and also true company growth and profitability.

When asked in an interview to predict the direction of the stock market in the short term, Warren Buffett, arguably the greatest investor of all time, said that he thinks it may go up, or may go down…or it might stay the same at any given time. Buffett is also quoted as saying, “In the short term, the market is a voting machine; in the long-run it is a weighing machine.”

When money is being pulled and placed in the market, back and forth instead of leaving it invested, people are often investing emotionally — and most often out of fear and greed. People tend to pull their money from the market after a correction or downturn and feel safe to invest money after they see the market start to come back a bit … this is NOT buying low and selling high.

Emotions must be taken out of investing in the long run and more individual focus needs to be placed on the time horizon for the funds, along with individual objectives and risk tolerance, and maintaining a long-term vision.

However, keep in mind that there is just as much risk from staying out of the market! Returns do not come in a linear fashion. Market growth (and loss) often comes without notice and in all different sizes.

A study by Securian Financial Services, Inc., revealed that if you invested $10,000 in a hypothetical investment that performance similarly to the S&P 500 on Jan. 1, 1994 and left it in until Jan. 1, 2010, that $10k would have turned into $31,917. But if an investor would have just missed the best 10 single-day returns during that period of 5,844 days, then they would have eliminated about half of the total return — instead, they would have an account worth $15,928.

Here are some other figures on missing days during that period:

If you missed the best 10 days, the account would be worth $15,928

If you missed the best 20 days, the account would be worth $9,990 (less than invested!)

If you missed the best 30 days, the account would be worth $6,690

If you missed the best 40 days, the account would be worth $4,595

If you missed the best 60 days, the account would be worth $2,355

Now, of course, this is one example of a specific period in the past, but it certainly demonstrates the risk for long-term investors of not being invested.

In conclusion, the majority of any investment decision is determined by the projected time horizon of use and need of the funds, along with individual risk tolerance and objectives. When a long-term time horizon is anticipated, an investor may be better off keeping his or her money invested.

Market timing typically skews from investing to a form of market gambling, which, for most, is fueled by emotions that can misguide a well-assembled and educated investment strategy.

Jon C. Ylinen is a Financial Advisor with North Star Resource Group and offers securities and investment advisory services through CRI Securities, LLC. and Securian Financial Services, Inc., Members FINRA/SIPC. CRI Securities, LLC. is affiliated with Securian Financial Services, Inc. and North Star Resource Group. North Star Resource group is not affiliated with Securian Financial Services, Inc. but is independently owned and operated. The answers provided are general in nature and are not intended to be specific recommendations. Please consult a financial professional for specific advice in relation to your individual circumstances. This should not be considered as tax, specific loan repayment for an individual or legal advice. 645478/ DOFU 4-2013

Past performance is not a guarantee of future results. Investments will fluctuate and when redeemed may be worth more or less than originally invested. The S&P 500® Index is a commonly recognized, market capitalization weighted index of 500 widely held equity securities, designed to measure broad U.S. equity performance. One cannot invest directly in an index. Indices do not contain investment expenses, which would reduce returns.

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