The Dow Jones Industrial Average (DJIA) index is up 13.8% half-way through the year. The Standard & Poor 500 (S&P 500) index is up almost as much, at 12.6%, but the markets didn’t rise over the last six months in a straight line. They rarely do. The markets were all over the place. Sometimes up, sometimes down, especially over the last month.
Two weeks ago, the DJIA had its first three day triple-digit winning streak of 2013. Market timers were buying in. This followed a three day plunge the week before. Market timers were getting out. The ultimate result of their actions is what we call “buying high” and “selling low.” That is the opposite of what you want to do.
Recently, the stock markets seem to have the “jitters.” To put it another way, the stock market was “skittish” during the first half of the year. Why was that? Could investors and their advisors have seen or forecasted this skittishness? The answer is an emphatic NO!
Remember, it has been proven time and time again that all knowable and predictable information is already reflected in the price of a stock. The academic research is overwhelming. It has been proven time and time again that only unknowable and unpredictable information causes a stock to go up or down. The only “pattern” is that stocks tend to rise over the long run.
Interestingly, if there are 100 advisors, 50 predict that a market will rise and 50 predict a downturn, then the 50 who were correct will be hailed as stock market seers, and their opinion will be highly sought after. The next time that happens, of the 50 winners the last time around, 25 may predict a market rise and 25 may forecast a downturn. The 25 who were correct will be declared stock market geniuses.
But doesn’t this sound more like “chance” rather than “skill”? You bet it does! Luck truly has more to do with market timing success than any other factor, but it is almost impossible to convince most financial advisors of this truth. Yet, as mentioned, there is the issue of “unknowable and unpredictable information” that can cause an upswing or a downturn. Does this actually happen? Sure it does. Can it be predicted? Obviously not, since by definition, it’s unknowable and unpredictable.
A perfect example of this was the Federal Reserve declaration that they will wind down its qualitative easing efforts – eventually – if it made sense for the economy.
So the markets dropped, only to rise again a week later. The apparent result? The S&P 500 index was off 1.5% for June, but up for the quarter and up for the year.
So, how should the prudent, long term investor react to all of this skittishness?
Diversify- focus on asset class diversification not sectors.
Own equities– avoid market timing, stock picking, or chasing yesterday’s winners.
Rebalance- religiously.
Here’s a link to a 2 minute video from Rueters about the 3 day stock market surge two weeks ago, which followed a 3 day drop the week before.