I always hear that “timing the market” or taking all your investment or retirement money out of the market in anticipation of stocks losing value is a horrible thing. These people say that it is impossible to know if your timing is correct and that you have to take your money out at the right time and put it back in at the right time. They also quote some crazy stats like “if you missed the biggest 10 days in the market over the last few years, your return would be cut in half!”
I think that is bogus. And I think that timing the market is very possible for the ordianry person. I’m not talking about taking all your money out because you think the DOW is going to lose 100 points today. I’m talking about taking your money out when you see dark storm clouds on the horizon. In my opinion, investing is like fishing. When you see storm clouds coming when you are in the middle of a lake fishing, it’s time to wrap things up and get out of there. In relation, when the economic outlook isn’t good and you hear worse and worse things about the economy and stocks in the news, it’s time to think about pulling your money out.
Let’s take a look at some of the obvious warning signs that came before the recent 40%+ decline on Wall Street. In September and October of 2007 it was obvious that there were significant problems in the housing market and forclosures were starting to soar. It was obvious to many that real estate was overvalued and had to come dramatically down. This is a huge fundemental problem with the economy…big storm clouds…time to get out and play it safe. Although these problems were obvious, important people such as the FED chairman were saying that the problem would be contained and wouldn’t spread to the rest of the economy. So maybe you bought it and held on to your investments hoping everything would be ok. Then Bear Stearns, a giant investment bank completely failed and had to be bailed out by the government. On top of this, a number of regional banks have been taken over by the FDIC. At this point, when a major investment bank goes under and the housing market continueing it’s spiral downward, it is extremely obvious to most people that the economy is in trouble. So, it’s time to pack up and head home (sell your investments in the stock market). It’s always easy to look at these things in retrospect and point out the signs, but it is always harder when it happens in real time. But let me tell you, to me this was clear as day and to anyone that pays attention to economic news should have seen it coming too. ( I sold off all my investments a week or two after the Bear Stearns collapse).
Lets take a look at the market to see how much could have been avoided by the average Joe if they took the time to pay attentiont to economic news and took out their money after the Bear Stearns collapse.
Look at that, wow. If you can simply pay attention to the everyday economic news and take the time to understand it, you can easily step out of the market before things get brutal. Now I’ll be honest, I never expected it to get this bad. I had a hunch that it could get nasty since their was a large and fundemental problem with housing (a huge part of the economy), but I was still shocked to see how bad it got.
So now that your out and happy as all get out that you aren’t losing your shirt like everyone else, how do you know it’s time to get back in? In my opinion, it is harder to predict the bottom of a downturn than to predict a downturn is coming up. Here is how I do it though:
- Pay careful attention to the news and how the stock market is acting on a daily bases.
- Check out the volitilty index (VIX).
- Ignore anyone that claims “the bottom is in!” In a recession or depression, the market makes several short term bottoms and they are often broken when the market continues to move lower. (Lookat the middle of July and October).
- When volitilty decreases over a period of time (month or two), giant companies aren’t going bankrupt, and the market has made significant lows, it’s time to start thinking about DOLLAR COST AVERAGING back into the market.
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