No Time Like The Present

MarketWatch featured an article titled “No time like the present,” presenting the usual but questionable advice about investing. Let’s take a look:

While trading in and out of funds is frequently a recipe for disaster, there are moves that investors can make to improve their confidence and portfolio without blowing up the long-term returns that they supposedly surrender by giving up on a fund.

To see why that is, consider that the standard advice warns against riding trends or timing the market, because it’s hard to use those strategies to improve returns consistently over the long haul. The evidence supporting the idea that investors are supposed to stay put in funds during downturns is a long-running study from Dalbar Financial Services, which shows that the Standard & Poor’s 500 had an annualized average gain of 11.8% over the last two decades, but the typical equity fund investor was able to capture just 4.3% annually.

Yes, standard advice recommends staying put with your investments no matter what. This sounds great in theory, as does an average gain of 11.8% over the last 2 decades, but it does not tell the entire story.

What does tell it is when an investor calls to tell me that his portfolio dropped some 50% during the last bear market and that it altered his upcoming retirement plans forever. He was not impressed by the fact that he may be able to get an average gain of 11.8% over the next 20 years. Why? Because actuarial tables tell him that he will be dead by the time that 11.8% comes around again.

There are lies, mean lies and statistics. You can prove or disprove anything depending on the chosen time frame. For example, from 12/31/1999 to 3/20/2008, which represents this century, the S & P 500 still shows a negative return of some -9.5% because of the last bear market. It will take a huge bull market to turn that around to a positive 11.8% over two decades.

But if you talk to the guys who study behavioral finance — the way investors act — they are not opposed to small moves to boost confidence. They’ll warn of the dangers of portfolio overhauls, where an investor claims to make faith-inspiring moves, but is really just tilting a portfolio in the direction of what has been hot lately.

The changes to consider in times like these are more about upgrading a portfolio than overhauling it.

Overhauling a portfolio refers to investing in mutual funds that have done well in the past. The article cites a number of them, which all have shown a performance history superior to the S & P 500. However, before you jump in, consider that all of them are bull market funds, which will go down if the bear rears its ugly head again. To me, those odds are pretty high based on my trend tracking indicators and the bursting of the various bubbles.

As I said before, you will be better off being a little late to the party by making sure that a new major uptrend is in place before you invest. While it will cost you a little on the upside, you will also have eliminated some big headaches if we head further south again.

About Ulli Niemann

Ulli Niemann is the publisher of "The ETF Bully" and is a Registered Investment Advisor. Learn more
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