A while back, I posted a video from DFA’s Jim Davis which asked the question, “Can You Predict a Good Time to Buy and Sell Stocks?” In the video, Jim summarizes research he has conducted which suggests that not only can you not time the market, but that there are negative consequences to trying.
If you visit the Accountable Update regularly, you probably already know that. Jim uses an illustration in the video where he shows the probability of flipping ten consecutive heads when tossing a coin. The odds are .001%, or 1 out of 1000.
According to the ICI Factbook, there were about 5000 equity mutual funds at the end of 2016. So remember that at the top of a list of the best performing mutual funds, while their may be some good choices, there are also 5 that flipped 10 heads in a row on the way to their headline grabbing out-performance.
The way the investment marketing and sales business works, those 5 funds are some of the ones you are most likely to see advertised, referenced in news articles, or cherry picked by brokers to convince you to buy. (That’s one reason why you always see the disclaimer that past performance does not predict the future.)
With the recent market sell-off, all you need to do to find evidence of those lucky coin flippers is to turn on the business channel or pick up an investment magazine to see or read what someone that “predicted the last downturn” has to say. Remember, the odds are that several of them got it right just on pure chance alone. These stories will appeal to your emotions. They will confuse you with the blurring of luck versus skill. Hopefully before acting on that emotion, you will call someone like me to discuss what you’re feeling.
Vanguard founder, John Bogle, in a July 2014 AAII Journal article, relayed a great story about the value of working with an advisor in volatile markets such as we’ve recently experienced.
Investors should consider far less trading activity. We have a financial system built on activity.
I’ll close with a little story from an investment adviser I talked to some years ago, out in Milwaukee. He said, “Look, Mr. Bogle, I know you’re right. You could just stand there and do nothing, put 65% in the stock index, 35% in the bond index and never change anything. So I tell my client to do that, and he comes back a year later and says ‘What do I do now?’ and I say, ‘Nothing.’ And he comes back a year later and he says ‘I didn’t do anything last year, not one change. What do I do now?’ The answer remains, ‘Nothing. Do nothing again.’ And he comes back again a year after that, it’s now the third year, and he says, ‘What should I do now?’ I again answer, ‘Do the same thing. Nothing.’ Then the client says, ‘What do I need you for?’” The adviser asked me, “How do I answer that question?” I said, your answer is, “You need me to keep you from doing anything.”
That’s right, the value in paying an advisor like me is primarily to keep our clients from doing something harmful to themselves. Investing isn’t rocket science, but is hard because of human nature. That nature is why we ultimately believe that markets work and that, given enough time, your patience will be rewarded for staying the course.
No one knows if the market is going to go up or down in the short term, any more so than what the next flip of coin may yield. History has shown that the price of missing the relatively few days that the market makes strong moves to the upside can dramatically impact individual performance.
If you find your patience being tested, you can always pass the time by flipping a coin.