jim hardestySeveral times a month I am asked where I think the stock market will be in six months or a year. The question implies that I am some sort of stock market astrologer, and that would be very scary. I just reply “I have no idea.” In the short term, I doubt that anybody has much of an idea where the stock market will go. But over the last 75 years, the market has provided an average total return of 9.4% compounded annually, comprised of 5.4% price appreciation and 4.0% dividend yield.

But the market direction question is really trying to ask is how do you time the market: when do you sell out and when do you buy in? This strategy of market timing is fraught with risk and can be very dangerous. The timing of the market requires two critical decisions: when to get out and, more importantly, when to get back in. The second decision, when to reenter the market, is really the hard part. If you have sold correctly and the stock market has declined, you may believe you are a genius, and this could cause you to be very timid when it comes to reentering the market.

Many stories of market timers are similar to the 1973-77 experience of Anthony Loreto, the Chief Investment Officer of the Summit and Elizabeth Trust Company. In early 1973, the Dow Jones Industrial Average set an all-time closing high of just over 1,050. Very high levels of inflation, a variety of political issues, including Watergate, and an overheating economy all convinced Loreto to liquidate his entire holdings of stocks. He deployed the money 50% in money market funds and 50% in gold, then selling at $65 an ounce. Nearly two years later, in the fall of 1974, the Dow had fallen nearly 45% to 577 and gold had jumped to $165 an ounce. Tony was a genius. He had survived the worst market since 1929 and, in fact, the sharp rise in gold enabled him to report an overall positive return. Tony was famous on magazine covers, newspaper articles, and the speaking circuit on Wall Street. However, the story has a sad ending. As last I heard, Tony was still 50% in the money markets and 50% in gold. He had missed the greatest bull market of all-time, one where the Dow had risen from 577 to a current level of just over 15,600, confirming that market timing can be a double-edged sword. Few, if any investors get both the buy and sell side of the timing drill right.

Successful investors establish investment goals consistent with their tolerance for risk, their age, and the amount of money they have to invest. Once an asset allocation has been put in place, the hard part begins. The investor must be patient through the ups and downs of financial asset prices and make changes only when the investor’s personal circumstances are expected to change materially. Patience in the investment process is both the client’s best friend and dangerous enemy, but when in doubt – stay the course.

 —as published in Homeland Magazine