Market Timing: From "The Social Animal" by David Brooks

While on vacation I have been reading "The Social Animal" by NY Time columnist David Brooks. The book follows the social development of two individuals . One from an upper middle-class background and the other from a culturally diverse urban background.

In Chapter 10, on intelligence, he has an anecdote on why intelligent people sometimes are not good investors:

"intelligent people have excessive faith in their intelligence, from 1998 through 2001 the First Hand Tech Value mutual fund returned 16%, the average investor in the fund lost 31.6%. Why? Because the geniuses thought they could get in and out of the market at the right moments and missed the important up days and caught the devastating down days."

This point has been proven in many other longer tern studies such as Dalbars annual study and others that show how missing the best 10 up days over a period of 10 years can be devastating to a stock portfolio.

Emphasizing this lesson for today: One should only be in the market if they do not need that money for at least 10 years. Therefore, I do not know, nor does anyone else when the market will change. But we do know that timing the market does not work, stock markets are hugely volitile at times, but over long periods they offer very good returns for those that stay the course. This crazy, scary volatility is the price one pays for the highr returns the stock market has historically delivered.

The Canadian Couch Potato defending passive investing. Especially relevant in a turbulent market .

The following blog link does a good job of defending passive investing - especially during these volatile times.
Remember passive investing is about building a portfolio that meets your risk tolerances and time horizons and then uses index funds as the investments in the portfolio. And, very importantly, staying with the plan unless time horizons or risk tolerances change.

http://canadiancouchpotato.com/2011/08/02/why-passive-investors-arent-really-lazy/