Predicting Investment Performance

There are many delusional people who actually think they can predict the near-term direction of the stock market and interest rates (interest rate moves influence bond prices and short-term investment yields). The best analogy to market timing is natural family planning. As a concept (please excuse the pun), it certainly sounds doable. And as a short-term strategy, it may even work. But, over the long-term, its failure will be announced with a lusty cry.

The allure of market timing, in other words, attempting to move into and out of various investment categories in advance of moves in those categories, is certainly understandable. Long bull markets make investors skittish. Quick market downturns scare everyone. The notion that you or someone can actually get out of the market just before it takes a dip and then get back into the market just before it rebounds is terribly attractive. I spent an inordinate amount of time in college trying to predict the market, and I had the grades to prove it. (While my friends were graduating cum laude, I graduated "thank you laude.") Fortunately, my investment resources were modest, so I learned a not-too-expensive lesson.

The big challenge. The major challenge in trying to time the stock market is not so much getting out of the market before it drops as it is deciding when to get back in. Some investors manage to get out in time, but more often they get out in anticipation of a drop that doesn't occur. The real challenge is getting back in just before the inevitable rebound. Usually, stock prices surge quickly after a drop, and the jump occurs just when gloom and doom permeate Wall Street and Main Street.

The golden rule. Recognizing that you'll never be able to predict the near term performance of the investment markets is epiphanic. Then you can confidently devise a diversified investment strategy and stick with it, even when you've lost money and the Wall Street pundits are spewing nothing but awful forecasts for stocks or bonds or both. Keep investing, using the power of dollar-cost averaging (investing relatively fixed amounts of money at regular intervals) which is precisely what most working age people are doing by contributing to their retirement savings plans and IRAs.There are many delusional people who actually think they can predict the near-term direction of the stock market and interest rates (interest rate moves influence bond prices and short-term investment yields). The best analogy to market timing is natural family planning. As a concept (please excuse the pun), it certainly sounds doable. And as a short-term strategy, it may even work. But, over the long-term, its failure will be announced with a lusty cry.