July 21, 2013

Timing the market is a really bad idea that many people attempt to do when investing. Why do they do it and why is it such a bad idea?

4 thoughts on “July 21, 2013”

  1. Katherine Graham says:

    People time the market in hope of outguessing the market and because they want to make money quickly. It is a bad idea, because it is impossible to time the market. Wise investors buy no-load index mutual funds and let time and compound interest do their magic.

  2. Mike Finley says:

    Right again, Katherine. Let me add a few things to Katherine stated. It is possible to time the market, but it is pure chance that you are successful at it. Just like that slot machine at the casino, sometimes you get a winner, most of the time, you don’t.

    The research is crystal clear on this matter. Individuals and institutions fail miserable when they attempt to time the market by investing with individual securities or picking “smart” managers who pick individual securities. Why? Katherine stated one reason. They are trying to make money fast. They also think they are smarter than the next person or institution. That is foolish and the research continues to show the folly in doing that.

    Those boring no-load index mutual funds at a place like Vanguard continue to beat all of the “smart” money. Simply identify how much money you want in stocks and how much you want in bonds and cash and then buy broadly diversified index funds to meet those allocations. Keep putting money away each month (dollar-cost averaging) and ignore people who try to convince you they know what direction the market is going. They don’t! Let’s finish this conversation with some commentary from others.

    Investors, both individual and institutional, and particularly 401K plans, would be far better served by investing in passive or passively managed funds than in trying to pick more expensive active managers who purport to be able to beat the markets. – Professor Edward S. O’Neal, Ph.D., after completing a study in which he found only 2% of actively managed funds beat the market over a 10-year period

    There are two kinds of investors, be they large or small: Those who don’t know where the market is headed, and those who don’t know that they don’t know. Then again, there is a third type of investor, the investment professional, who indeed knows that he or she doesn’t know, but whose livelihood depends upon appearing to know. – William Bernstein, The Intelligent Asset Allocator

    The investment business is a giant scam. Most people think they can find managers who can outperform, but most people are wrong. I will say that 85 to 90 percent of managers fail to match their benchmarks. Because managers have fees and incur transaction costs, you know that in the aggregate they are deleting value. You want to keep your fees low. That means avoiding the most hyped but expensive funds, in favor of low-cost index funds. Investors should simply have index funds to keep their fees low and their taxes down. No doubt about it. – Jack R. Meyer, former president of Harvard Management Company, who tripled the Harvard endowment fund from $8 billion to $27 billion.

    Most investors, both institutional and individual, will find the best way to own common stocks is through an index fund that charges minimal fees. Those following this path are sure to beat the net results (after fees and expenses) delivered by the great majority of investment professionals. – Warren Buffett, Berkshire Hathaway chairman 1996 Shareholder Letter

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