Monthly Archives: February 2009

Market Timing and the Passive Investor

Many people are now hearing how the stock market presents a great buying opportunity and that it is time to get back into the market.  I believe this is true, with one caveat. To put money back in the market at this point you have to be in it for the long-term. It is likely that the market will turn around at some point (if not we have bigger issues that investment returns) but when is a different question. I wouldn’t be surprised at all for the market to trade sideways or even decline for the remainder of 2009.

That said, if you can commit money long-term it is definitely better to be getting in now than waiting for the markets to show signs of recovery. The general population of investors, those investing for retirement through 401k’s and IRA’s, should not be trying to time this market.  Research shows that even missing the 10 best days of the market has a dramatic effect on investment returns. See chart below. Over a ten year period if you missed the 10 worst days in the S&P your return would swing from a 4.23% annual gain to a 4.7% loss (8.9% total difference). This is missing 10 days out of 2,515 or .4% of all days. It would be nearly impossible to correctly predict when these 10 days would occur. Another study showed that from 1900 – 2008 only missing the 10 best days, 2/3 of the cumulative gains in the Dow would be erased. Ten days out of 29,694 had that big of an affect on returns!


At this point I think the longer term concern in the stock market should be with inflation and our currency. The government basically has three options how to pay for the massive spending packages they are proposing:
-Sell Treasuries – Current major holders of US Treasuries include China, Oil Exporting nations, Brazil and Russia. All these countries are having their own financial issue so if they stop buying our Treasuries we will either have to raise the interest rates we offer or look for other financing (last two options). Raising rates is not good for business as it also raises borrowing costs for US business thereby slowing growth.
-Raise taxes – Not good for business or economic growth, especially investors.
-Print money – Eventually has to result in inflation which is not good for investors. Returns need to be higher just to maintain same level of purchasing power. Inflation is bad for savers / investors and good for those with debt. Also, by devaluing our currency we make no friends with the foreign nations who are holding US dominated investments (i.e. US Treasuries).

We will cover these issues further in a later post.