Are You Still Timing the Market?

A long-term investment plan should avoid speculating.

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I am amazed at the number of people I have talked with recently that believe the Dow Jones Industrial Average reached a ceiling at 13,000. This apparent ceiling will somehow cause stock prices to fall. This is their justification for selling out of stocks, which is nothing more than market timing. Jonathan Clements, columnist for the Wall Street Journal, famously pointed out “Market timing is a poor substitute for a long-term investment plan.”

It seems that many investors are concerned about the risk of owning stocks with the Dow at 13,000 yet seem unconcerned about the risk of owning bonds or gold. Even at 13,000 the Dow is still over 1,000 points below its high set back in October 2007. Corporate earnings are now higher than they were in 2007. Higher earnings should justify increased stock prices since valuations are driven by earnings.

But what about gold? CNBC’s Jim Cramer is saying that gold should break through $2,000 per ounce in 2012. Is gold more valuable than it was last year? I am surprised it is still trading at $1,750 per ounce. I think Warren Buffett did a great job of explaining the rise in gold prices in his February shareholder letter Why Stocks Beat Gold and Bonds: “What motivates most gold purchasers is their belief that the ranks of the fearful will grow.” There certainly is no shortage of fear in the economy today. Speculating on whether the ranks of the fearful grow enough to drive the price of gold higher is anybody’s guess. However, once the ranks of the fearful stop swelling, it is unlikely the normal demand for gold will be able to support the price.

This all amounts to market timing, which is speculating. Jim Cramer’s call on gold is a short-term prediction that may or may not be right. A long-term investment plan should avoid speculating. Instead, it should be based on asset allocation with periodic rebalancing to take advantage of the ups and downs in the market that no one can predict.

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