Updated: Nov 15, 2019
The stock market has dished out lavish returns for investors since the decade old stock market meltdown of 2008. The Dow Jones Industrial Average is up over 300% from 2009- 2018. Our current bull market ranks as the third largest in gains ever, and first in number of months at 107. This is important to note as the average historical bull market is only 43 months. It’s been good to be an investor as of late, really good!
So what now? – Is it time to retreat to cash and sit on the sidelines as we all prepare ourselves for the next and inevitable market crash? There is a term for this in the marketplace and it’s called “market timing”. Because of our human machinery and hard-wiring we are literally programmed to try to spot trends in just about everything within the realm of our consciousness. Our human nature survival instincts want to predict the next market decline, because if we could do so we could surely protect ourselves from loss and devastation, right? – Not so fast…
In his book “A Random Walk Down Wallstreet” Princeton University Professor Burton Malkiel makes the statistical case that the market does in fact have NO memory of where it has been in the past and that attempting to spot trends for investment purposes is no more than a fool’s errand and remarkably un-useful as an investment strategy. Moreover, Professor Malkiel subscribes to the Nobel Prize winning “Efficient Market Hypothesis” which provides statistical evidence that much of the technical and fundamental analysis of stocks that people use to try to know when to buy or when to sell is useless when it comes to achieving long term attractive rates of return on investment.
Let me give you an example: According to J.P. Morgan Asset Management, utilizing data from Lipper over a 20-year period from Dec. 31, 1993 through Dec. 31, 2013, a person who stayed fully invested in the S&P 500 and never sold, despite two substantial recessions (the dot-com bubble and the Great Recession) would have netted a promising 483% return. If an investor had missed just the 10 best days for the S&P 500 in a span of more than 7,300 days, their return would instead have been just 191%. By the time an investor misses the 30 best days, their gains have almost entirely been wiped out. The moral of the story here clearly is to stay risk adjusted, diversify and re-balance regularly. You can do that yourself or you can find a professional to do it for you.
Some of you may remember one of the greatest mutual fund managers of all time, the great Peter Lynch. In his book One Up On Wall Street, Peter writes "Every year I talk to the executives of a thousand companies, and I can’t avoid hearing from the various gold bugs, interest rate disciples, Federal Reserve watchers, and fiscal mystics quoted in the newspapers. Thousands of experts study overbought indicators, oversold indicators, head-and-shoulder patterns, put-call ratios, the Fed’s policy on money supply, foreign investment, the movement of the constellations through the heavens, and the moss on oak trees, and they can’t predict markets with any useful consistency, any more than the gizzard squeezers could tell the Roman emperors when the Huns would... attack. Nobody sent up any warning flares before the 1973-74 stock market debacle, either. Back in graduate school I learned the market goes up 9 percent a year, and since then it’s never gone up 9 percent in a year, and I’ve yet to find a reliable source to inform me how much it will go up, or simply whether it will go up or down. All the major advances and declines have been surprises to me. Since the stock market is in some way related to the general economy, one way that people try to outguess the market is to predict inflation and recessions, booms and busts, and the direction of interest rates. True, there is a wonderful correlation between interest rates and the stock market, but who can foretell interest rates with any bankable regularity? There are 60,000 economists in the U.S., many of them employed full-time trying to forecast recessions and interest rates, and if they could do it successfully twice in a row, they’d all be millionaires by now. They’d have retired to Bimini where they could drink rum and fish for marlin. But as far as I know, most of them are still gainfully employed, which ought to tell us something. As some perceptive person once said, if all the economists in the world were laid end to end, it wouldn’t be a bad thing".
Many years after these words were written by one of the greatest mutual fund managers of all time nothing has really changed. The investing public, both professional and amateur, are still seeking a holy grail, professors still teach their students that the market goes up 9 percent a year and the economists still have not retired in Bimini. So with the market up as it is, and with this bull becoming long in the tooth as it is, should one go to cash? I leave that up to you.... No, it wasn’t raining when Noah built the Ark. Noah was preparing for something that he knew would happen. One thing that we all know will happen is that one day we will leave the workforce and the quality of our retirement will have everything to do with the quality of our decisions with money and investing during our working years.
We believe that one should continue to learn, stay invested and diversified according to your risk tolerance, stay disciplined, and re-balance regularly. Education is your best defense against imprudent investing, and it's your best shot at the retirement that you hoped you would have one day.