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The air is thick with the shrill bleats of Economists and Finance Gurus, each making their call about when to get into the markets. Fishing for the bottom? If your timing is even a teensy bit off you could lose $1 in $5. Miss the boat and you miss profits that are gone for good.
Wind the clock back four crashes ago
Take a look at the S&P500 data from the four last bear markets1 :
- The bear market of 1973/74: There was a 42.6% total decline. The subsequent recovery saw the market move back up by 85.9% to the next peak. 9.4% of that upturn took place in the 3 months from the bottom. If you had been dithering around and not in the market when it lifted up off the bottom, you missed out on $1 in every $10 that was available from the market recovery.
- The crash of ’87: From a 29% total decline to the next peak, the gain was 64.9%. Missing the first 3 months of that upswing means you missed out on 17.2% of the total upturn; one-fifth of the money made from the trough to the peak.
- 1990: a 14.7% total decline followed by a 42% gain to the next peak. If you were 90 days too late it cost you $1 in every $7 of the total bounce-back.
- The tech-wreck of 2000-2: a 44.7% total decline followed by a 108.4% subsequent gain to the top of the next peak. Missing out on the first three months of that recovery cost investors 8.4% of the total potential gain.
The fact is that there is no way to know when the bottom is until it’s too late, you’ve missed it. The media screams ‘time the market’. However it can’t be done. Not systematically anyway.
The media is a screaming banshee. Ever-present and obnoxiously loud, its news reports, “scoops”, and “tips” are utterly valueless. Treat it like the ‘white noise’ that it is.
Instead realise that investing is not a gamble, there is a science to it. Forty years of academic research has uncovered some key principles for investors to follow ...
Four critical investment lessons
You can work this stuff out yourself but the cold markets are a harsh teacher and the tuition is very, very expensive. Instead learn these four investment lessons and profit:
- “There is no crystal ball.” Risk and return are related. They’re opposite ends of the same stick. However not all risks are worth taking – some don’t bear worthwhile rewards.
- “Forget the needle – own the haystack.” Don’t waste your time trying to time the market or pick winners. This approach doesn’t add reliable value, it simply adds speculative risk.
- “One plus one equals 3.” Whereas most people think that diversification is just about spreading risk, it’s actually about enhancing returns.
- “Know thy enemy: expenses.” Lower expenses increases investment returns. Surprised? You’d be amazed how many have no idea what it should cost.
These are not facts you’re likely to hear from financial planners who still cling to the myth of ‘active management’ like a toddler does with the Tooth Fairy.
If you’d like to hear how you can tap into an ‘evidence-based’ investment approach, then contact us today.
1. http://www.zeroalphagroup.com/news/052208_release.cfm
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