It doesn’t pay to listen to people or money experts that tell you what the market will do next because no one knows. Wall Street analysts and media pundits are fully aware of this, but they are paid to give opinions. And this is the reason why they do. The smart investors ignore this noise because they know market timing advice is worth nothing.
Markets are pretty efficient. The rational investors immediately incorporate all known information into share prices. Every day, changing circumstances are continually reflected in the market. Yet market timers routinely talk as if this is not the case. But old news will not drive the market. What will drive the market are things that are not widely anticipated.
Other market “experts” offer special insights. more commonly known as “guesses” about how the future will look like. But when you really think about it, how many people knew about the pandemic in advance? Or the financial crisis in 2008? Or 9/11? Or the invasion of Ukraine? Exactly, No one!
With other words: what is broadly known is already reflected in share prices and what will happen in the future cannot be known with any certainty.
So, if this is the case, how should I manage my portfolio then? The answer is very simple:
1. Understand that nothing really outperforms stocks over the long term
2. Accept that stocks can be very volatile in the short term.
3. Therefore, this makes it essential to diversify within (e.g. growth and value stocks, large and small companies, different industries and sectors and international stocks, worldwide) but also outside the stock market (asset allocation).
4. Analysing companies and only invest in the best quality stocks
5. Not trying to outguess the market, when is a good time to invest and when a bad time.
History tells us, the private investor wants to be out of the market, when volatility kicks in and markets drop. For sure, Joe Average does not invest when times look grim. But 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 and the higher the market goes, the more difficult it becomes to get back in.
Many private investors finally got out of stocks during the financial crisis because they couldn’t take the pain anymore. The Dow eventually bottomed out around 6,500. But for most of them it was also painful to see the market rise more than 5-fold over the next 13 years.
And that doesn’t include lost dividends. When you are not in the market, you also do not earn dividends during this time.
Market timers who tell you what to do are not really supportive. Do you really want to know what everybody already knows and what no one could possibly foresee? It only costs you time, money and high returns. Exactly those 3 things you need to reach your financial goals.
Sven Franssen