“Do you think the stock market is going up this year or will it be going down?” If I only had a nickel each time I was asked that question. I understand why people ask this, but I’m mystified why they think anyone actually knows. Even more troubling is that anyone would think the success of my investment strategy is based on my ability to answer that question accurately.
The financial news shows trot out “guru” after “guru” that espouse their opinion on the direction of the market. People watching these shows naturally come away believing their investment success is tied to the ability to be in the market when it is going up and in cash when it goes down. This is not an investment strategy – it is market timing. Financial columnist Jane Bryan Quinn said, “The market timer’s Hall of Fame is an empty room.”
Too many people assert that long term investing doesn’t work anymore. They point to the last 10 years and call it the lost decade – a period when no money was made in the market. We have maintained that a successful long-term investment strategy should be based on asset allocation with periodic rebalancing to take advantage of market volatility.
Dimensional Fund Advisors publishes a reference work each year for investment advisors and economists called the Matrix Book. The content is annualized rates of return for dozens of kinds of investments, with data as far back as 1926 and as recent as December, 2011. One of the most helpful pages is called “balanced strategies”, which shows the return of various equity and fixed combinations. For the past 10 years, a 60% equity, 40% fixed portfolio produced 6.7% return. This is far from a lost decade.
Don’t waste your time trying to guess which direction the stock market is going. Focus on developing a diversified portfolio that is properly allocated between equities and fixed income. Periodically rebalance when market volatility causes you to be overweighted on one side or the other.