So who made money market-timing this past month? Anyone? … Anyone?

I’m frequently amazed by how much emphasis people put on trying to predict stock markets or listening to people who try to do so. If there has ever been a good example of how utterly impossible it is to exploit short-term market movements, it’s been the months of October and November. 

In October, various stock markets dropped 5% to 10% (depending on your time frame and market benchmarks) on a number of “fears,” all of which were not necessarily clear. Ebola was one of them. Earnings, Europe, China, etc., were others. If you noticed, the market dropped really far, really fast. I believe the Dow dropped about 1,000 points in nine to 10 days!

Since mid-November, the U.S. markets have been on a huge ramp-up of something like 1,900 points on the Dow — again in a very short period of time, relatively speaking. Where will December go? Who knows?!

In roughly one and a half months, the markets made such statistically significant movements that it seems almost impossible to imagine anyone could have exploited them. Does anyone know of a single market commentator or advisor who actually exited the stock market in the early-October tops, only to get back in during the mid- to late-October bottoms with precision? Maybe they exist, but I can’t find them. Of course, in mid-October a bunch of pundits argued, “Look, I called it, the market’s crashing. I told you so!” By the end of October, those talking heads all disappeared (or they changed their minds, hoping no one noticed). They were replaced with new talking heads who were saying, “I bought a bunch of stock at the bottom.” Of course, we only heard from them after the fact!

All of this, whether timed right or wrong, offered you essentially useless information. In fact, by reacting to their Monday-morning quarterbacking, you would have likely fared pretty poorly. Yet many folks continue to listen to and place money with people who actually believe they can time the markets with precision. Unfortunately, some people freaked out and left the market in October. Furthermore, some folks — possibly the same folks who bailed in October — have just recently started buying back into the market after this huge run-up. Remember, market timers have to be right twice every time they make calls — otherwise, they’re simply wrong. 

Why do investors still do this? It’s likely because they have no plan. Or they may believe in others who act like they have a plan, and then they assume the pundit’s plan should be their plan. That’s unfortunate, because clearly those of us who used the “let’s not react” plan or followed the “let’s rebalance” plan did just fine over the past two months. 

Here’s what you might want to do if you still suffer from the illusion that you can time the market, or if you feel compelled to rely on false prognosticators:

(Continued)

1. Create your own sensible plan based on goals, risk tolerance, and circumstances and then stick to it until your goals, risk tolerance, or circumstances change. I emphasize “you” in this suggestion. 

2. Only invest if you’re optimistic about the future. Stocks and bonds can really only pay you back and provide you some risk-adjusted return if the economic future is going to be better than the present. If you lack optimism, don’t invest at all — rather pursue safety at the expense of earning anything while also betting against mankind’s thousands of years of progress.

3. Optimize your cost structure when investing. In some places, there’s likely little to no value in paying more than index fund fees, while in others, paying extra is worth the price. The point is, make sure you’re getting value for the fees paid.

4. Depending on where you hold your money (taxable versus tax-deferred accounts), pay attention to the tax impact of trades. For many folks, trading out capital gains can cost 15% to 48%+. When you have taxes possibly costing you up to half of your return, you need to be tax-aware.

5. Work with those who recognize the folly of prognosticating and who instead offer you a process to build a sensible plan honoring the fact that the future is unknown. 

6. And finally, stay away from the pundits and advisors who think they know what the future holds. They don’t. You’re wasting your time and money listening to these confidently delusional people, and such a relationship will never end well. 

Hopefully, the above tips can be the foundation of a good plan if you don’t already have one. And as you can see, even if you had built a horrible plan by following these suggestions, you still would have been better off in October and November than if you’d had no plan at all. 

Michael Dubis is a fee-only certified financial planner and president of Michael A. Dubis Financial Planning, LLC. He is also an adjunct lecturer at the University of Wisconsin Business School James A. Graaskamp Center for Real Estate. Mike can be reached at financialperspectives@gmail.com.

 This article contains the opinions of the author. The opinion of the author is subject to change without notice. All materials presented are compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. This article is distributed for educational purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, products or services described in this website or that of the author’s. Mike Dubis does not guarantee the relevancy, appropriateness, or accuracy of any outside information or links. Mike Dubis does not render or offer to render personalized investment advice or financial planning advice through this medium. All references that might be made to an investment or portfolio's performance are based on historical data and one should not assume that this performance will continue in the future.
THIS COMMUNICIATION MAY NOT BE USED BY YOU AS A RELIANCE OPINION WITH RESPECT TO ANY FEDERAL TAX ISSUE DISCUSSED HEREIN AND IS NOT INTENDED OR WRITTEN TO BE USED, AND CANNOT BE USED, BY YOU FOR THE PURPOSE OF AVOIDING PENALTIES THAT MAY BE IMPOSED ON YOU BY THE INTERNAL REVENUE SERVICE.

Click here to sign up for the free IB ezine — your twice-weekly resource for local business news, analysis, voices, and the names you need to know. If you are not already a subscriber to In Business magazine, be sure to sign up for our monthly print edition here.