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/

Stock Markets Returns Following Terrible Months

A reminder that the stock market does rebound. Since 1926, the general stock market, as represented by the S&P 500 - the largest 500 stocks in the US market, has had 61 months with a monthly return of -7% or worse. The average returns of the following years were always positive. The subsequent 1, 3, 5 and 10 year average returns are in the data below: 

S&P 500 Start Date January 1926 End Date December 2009 Threshold -7% Months at or Below Threshold 61 Months in the sample  1008 Annualized Average Compound Return Over Subsequent Periods (starting the next month) 1 Year 7.30% 3 Years 9.10% 5 Years 9.90% 10 Years 8.90%

The S&P data are provided by Standard & Poor's Index Services Group. Indexes are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results. Not to be construed as investment advice

"Time to Panic? Just the Opposite"

Words of wisdom from David Kansas's column in todays Wall Street Journal:

"It is only natural to be a bit scared by Thursday's market rout. But investors shouldn't let fear guide their decisions.

With the Dow Jones Industrial Average down more than 10% from its recent high—officially a correction—many investors expect more trouble ahead. Whiffs of panic and plaintive cries for more intervention from the Federal Reserve underscored the market's suddenly fragile sentiment on Thursday. Only three of the stocks in the Standard & Poor's 500-stock index rose.

It is times like this, when the selling stampede gets the loudest, that shrewd investors need to step back and examine the situation with steely cool. From mayhem, opportunity can arise.

That is easier said than done, of course. In the U.S., the Big Debt Deal reached this week didn't mollify investors; instead it sparked fears that spending cuts could curtail growth. Recent data have hinted that the economic recovery already could be stalling.

Over in Europe, speculators are starting to bet that Italy, the third-biggest economy in the euro-zone, might face funding problems. Given Europe's inability to deal with minnows such as Greece, a flopping big fish could present existential questions for the common currency.

Safe havens, meanwhile, are flourishing. Some short-term Treasury debt has sporadically traded at negative yields, meaning investors are paying to hold them.

In short, it is all a big chocolate mess.

Or is it?

Congress avoided a default, so why did stocks take a tumble?

Corporate profits remain robust. Around 80% of S&P 500 companies have reported quarterly results and the average positive surprise is 4%, double the average of the past 25 years. Moreover, aggregate corporate earnings and revenue are both up about 13% from the year-ago period, according to Yardeni Research.

On top of that, corporate cash balances are at record levels and a growing number of companies are buying back shares and raising dividends.

American corporations have shown that they can make a lot of money even if the economy isn't sprinting. And Wall Street analysts believe they will continue to do so. In the last week of July, they raised earnings estimates for all 10 S&P 500 sectors.

Strong profits may seem like white noise as the stock market cascades lower. But at a certain point, the fury subsides and fundamentals come back into focus. .....

So, as the markets crater around you, keep a cool head and look for opportunities that make sense. As Warren Buffett says: "Be fearful when others are greedy, and be greedy when others are fearful". No shortage of fear out there on Thursday."

Planet Money : NPR

Good discussion on education, government finances and health care. The Planet Money reporters always do a wonderful job explaining and discussing economic and financial issues.

Planet Money : NPR

Tim Harford: Trial, error and the God complex | Video on TED.com

Our world is so complex, no one person can understand, manage or control:
Science
Politics
Economics
Investing

Tim Hartford is one of those economists that makes economics accessible for the masses.

Tim Harford: Trial, error and the God complex | Video on TED.com

Brain Pickings - cool web site/newsletter for people interested in our world.

I came across this site and thought I would share:

http://www.brainpickings.org/