March 9, 2011 marked the second anniversary of the bear market bottom when the Dow Jones Industrial Average closed at 6,547. Two years later this popular index has nearly doubled to close at 12,213. What have we learned from the last two years? Scanning the headlines of the financial press would suggest that we have learned nothing. Many articles lead with “Is Now the Time to Get Back Into Stocks?”, which suggests that successful investing is somehow tied to timing the market. These headlines imply that to be successful, you need to know when to be in stocks and when to get out. This is utter nonsense.
Fund flow records from two years ago show that investors pulled billions of dollars out of stock mutual funds as the stock market was bottoming out. Now that the stock market has nearly doubled, the Investment Company Institute reports that investors have put $24.2 billion into stocks in 2011. It would seem to me that this market timing strategy has resulted in buying high and selling low. That is not a strategy for investment success.
Our strategy centers on achieving our clients financial goals over their lifetime. An allocation between stocks and fixed investments is determined during the first few meetings. This forms the strategy that is formulated to achieve their goals with the least amount of risk. Ideally this allocation will never change. We monitor the allocation and periodically sell some of the stocks when the client has too much in stocks. This happens when the stock market goes up because stocks usually produce a higher return than fixed investments. In March of 2009 the opposite happened. Many of our clients had too much in fixed assets because the stock market dropped. Our strategy called for selling fixed investments to buy stocks. This process forces us to buy low and sell high to maintain the allocation.
The great investor Warren Buffet said he never met a man who could time the market. Don’t base your investment strategy on headlines. Put your financial goals in writing. Develop a strategy to achieve them. Stick to your strategy.