It doesn’t pay to listen to what prognosticators tell you the market will do next.
Why? Because no one could possibly know.
Wall Street analysts and cable news pundits themselves are fully aware of this.
Yet they are paid to give opinions. And so they do.
Experienced investors will pay them no heed.
They know market timing advice is worth exactly what you pay to hear it. Nothing.
It’s important to understand why this is…
Markets are pretty darn efficient. Rational, self-interested investors immediately incorporate all known information into share prices.
Positive developments affect share prices positively. Negative developments affect them negatively.
But what’s positive for one company may be negative for another.
If oil and gas prices rise, for example, that’s good for energy companies. But it’s bad for airlines and trucking companies.
A strong dollar – like the one we’ve had lately – is negative for exporters because it makes their products more expensive in foreign markets.
But it’s positive for importers because it makes their goods less expensive in our domestic market.
Every day, changing circumstances are continually discounted in the market.
That’s the reason for the old saying “If it’s in the papers, it’s in the price.”
Yet market timers routinely talk as if this is not the case…
Listen to the talking heads on CNBC, for example, and they will tell you that they are bearish on the market because inflation is hot, the Federal Reserve is aggressively raising rates, the supply chain is still snagged, there is a war in Ukraine and there’s a possible recession ahead.
Yet everybody knows these things already. And investors worldwide have already bought or sold accordingly.
Old news will not drive the market higher or lower next week or next month. What will drive the market are things that are not widely anticipated.
For example, the Federal Reserve is expected to raise interest rates three-quarters of a point this week.
Markets will react if the rate cut is greater or less than that. But a three-quarter-point rate increase won’t surprise anyone.
Fed commentary may affect the market (and especially unexpected Fed commentary). But a three-quarter-point hike is a virtual given.
And the stock and bond markets have already priced it in.
Other market prognosticators make a different mistake, however.
They offer special insights – more commonly known as “guesses” – about what the future holds.
Think about the conceit of this for a moment.
How many people knew about the pandemic in advance? Or the financial crisis in 2008? Or 9/11? Or the invasion of Ukraine?
No one. (Except, in some cases, a handful of perpetrators.)
Yet a Wall Street strategist is going to lay out how the future will unfold?
It reminds me of that old Woody Allen line “If you want to make God laugh, tell him about your plans.”
At this point, some will ask, “If what is broadly known is already reflected in share prices and what will happen in the future cannot be known with any certainty, how should I run my portfolio?”
The answer is you should run it with an understanding that nothing outperforms stocks over the long term, but also with a keen appreciation that they are subject to extreme volatility in the short term.
That makes it essential to diversify outside the stock market – in bonds and real estate for example – and within the market, among growth and value stocks, large and small companies, and foreign and domestic markets.
Can you really outperform this way?
Indeed, you can. However, you do it by analyzing companies – like all history’s greatest investors – not trying to outguess the market.
It can feel comforting to exit stocks and move to cash or bonds when the market is reeling.
But you’ll feel foolish later when you see how rapidly stocks can go up.
Moreover, once investors miss the start of a rally, they are reluctant to invest again.
Having missed the upside, they don’t want to experience the downside.
Yet eventually stocks will take off in earnest. And the higher the market goes, the more difficult it becomes to get back in.
I have friends who got out during the financial crisis because they couldn’t take the pain anymore.
The Dow eventually bottomed out around 6,500. And it was also painful for them to see the market rise more than fivefold over the next 13 years.
And that doesn’t include lost dividends.
Market timers act like they are lending you a hand. But how is it helpful to hear some combination of what everybody knows and what no one could possibly know?
That only costs you time, money and high returns.
And those are exactly the three things you need to meet your most important financial goals.
P.S. Check out my Single-Stock Retirement Play right here.