A Time to Buy, and a Time to Sell…

The Book of Ecclesiastes elegantly speaks of life in terms of cycles. “A time to plant, a time to reap … a time of war, a time of peace…”. The stock market also moves in cycles. We have seen dramatic up moves, and gut-wrenching drops. The question I am getting is: are we at the bottom? Is it time to back up the truck and load up on stocks? The answer is … I don’t know. What I do believe, though, is that America is one of the preeminent economies in the world, and we will still be buying products from Kraft, Kellogg’s and Dell from retailers like WalMart, Amazon and BestBuy five years from now. Further, in 5 years, we will all probably look back and wish we had invested more with a Dow at under 9000.

If we are at, or near, the bottom, market history is very telling. Looking back at the last 3 bear markets, the subsequent 5 calendar years, after the bottom, have averaged a return of 14.5%. Well over the long-term (100 year) average market return of 9.6%. That additional 4.9% would earn an additional $9600 on a typical $25,000 retirement account just over those 5 years! (List of Financial Calculators.) So, while I can’t tell you we are at a bottom, I would point out another couplet from Ecclesiastes: “A time to gain, a time to lose…”. Many of us have already felt the pain of the losses, but let’s not miss out on the subsequent gains!

Investing in a Process vs. a Product

I am not the first to point out that when markets are in a free-fall, it often makes for a great buying opportunity (given the benefit of hindsight, and of course, the availability of "dry powder" to actually do the buying with.) A recent article in the November issue of Wealth Manager makes the observation that most investors tend to follow the emotions of fear and greed. They continue to buy what is going up, and sell out of what is going down. Precisely at the wrong time, though.

One way to overcome the dueling emotions of fear and greed is to have a disciplined investment process. This can be accomplished using a professional adviser, or having the time and ability to go it alone. Note, that many advisers are guilty of the same thing as individual investors, since they don't have a disciplined process, often they are just pushing a "product".

I have always maintained that I cannot see into the future when it comes to the direction of the market, but I do sleep well at night because I have a process. In my case, and with my firm it boils down to active asset allocation using low-cost investments, and making necessary adjustments as the market dictates. Investment products are difficult to judge, open up any issue of Money magazine, and they will invariably have an article pointing out the "Top Funds of Last Year" (or something similar). Numerous academic studies have shown the folly of expecting these will be the best funds to be in going forward. Again, that is merely going after a "product" and not a "process". Long-term success with investing comes with patience and discipline; both often missing in the midst of a bear market - when they are needed most!

The Presidential Election and the Stock Market

As the election comes to an end many investors are reconsidering their portfolio allocations for the coming months. Some investors are looking at the election as an opportunity to re-enter the market with money they have had on the sideline. I was recently asked if the election usually provides a buying opportunity.

You may be surprised to know that it doesn't really matter. Over the short-term the market tends to be driven by the emotions of fear and greed. When people are optimistic, they tend to buy into the market causing prices to rise. When people are pessimistic, they tend to sell out of the market causing prices to fall. Additionally, when people are uncertain they tend to stay where they are or sell, but investors rarely buy during periods of uncertainty.

Since the period preceding the election is usually one of uncertainty, throughout history the market has frequently declined leading up to Election Day. Conversely, after the election the market tends to experience a bounce once it's been determined who will be in charge over the next four years. However, when the initial enthusiasm fades investors once again focus on company fundamentals which ultimately determine the direction of the market.

The direction of the market has been the subject of a great deal of debate. A recent TD Ameritrade poll found most Americans remain pessimistic about the future of stocks.

• "Americans say they do not anticipate a stock market recovery in near future (within six months) and one in five people (20 percent) indicate they think it will be one year or longer before the stock market will be higher."

It's important to remember that over the long-term the market doesn't move on emotion it moves on company earnings. There are great companies growing their earnings in spite of the economy. If you are looking for long-term investments, you should focus on strong companies that will grow their earnings over the next 20-years, rather than who will win the White House. So don't fret over the day-to-day value of your 529 Accounts, 401(k) accounts, or other longer-term investments.