Blogs > Your Money

Dave Patterson and Erin Preston, a father-daughter team of Certified Financial Planner® licensees, provide thoughts and suggestions on a broad collection of personal finance topics.  Information provided in this BLOG is intended to be of a general nature and may not be appropriate for all situations.  Readers should consult with their own financial advisors before relying on any information contained herein.

Thursday, July 30, 2009

We Hope You Stayed in the Market!

Today (July 30th, 2009) the Dow Jones Industrials closed up 83.74 points, making July, so far, the best monthly gain in 23 years (since 1996). For the year, the Dow Jones Industrial Average is at a high. Of course, anything can happen, so it may not be the best monthly gain when the market closes tomorrow.

Regardless of what happens tomorrow we hope you weren’t like the typical investor who buys high and sells low. Many of these typical investors cashed in all their equities months ago when the outlook was bleak. In many cases these were the same people who jumped on the tech bandwagon in 1999 and 2000 to invest heavily in “dot com” stocks that had zero earnings.

Last fall for the Oakland Insider insert, we wrote an article titled “A Lesson from Warren Buffett”. We quoted one of our favorite Buffett quotes: “I will tell you the secret of getting rich on Wall Street. You try to be greedy when others are fearful, and you try to be very fearful when others are greedy.” We went on to point out what Warren was doing last fall when others were very, very fearful:

“While many contemplated pulling everything out of the market, Buffet invested $ 5 billion in Goldman Sachs. Amidst the market turmoil, Goldman Sachs’ stock had dropped a whopping 36% over a ten day period! Buffett drove a very hard bargain that bought him preferred shares in Goldman that can not be converted to equity and it pays a 10% dividend. The dividend is equivalent to $1.3 million a day to Berkshire Hathaway. At the time of this writing, it was just announced that Buffet had made a similar investment in General Electric.”

Today, G.E. stock was up 7%!

The point of all this is, that it is extremely difficult to time the market. In order to invest properly (buy low and sell high), you need to eliminate the emotions of investing. To do that, you need to choose a widely diversified portfolio with a level of risk (stock/bond ratio) that you can live with through all types of markets. If you then periodically rebalance that portfolio on a regular basis (at least annually), it will force you to buy low (the under-allocated asset classes) and sell high (the over-allocated asset classes).

To successfully time the market you need to know when to get out and when to get back in. You have to be right twice. Being right just once is tough to do. Since it’s impossible to consistently time the market, you need to always maintain a presence in the market. Avoiding a portfolio with too much risk makes it easier to stay in the market during difficult times.


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