Why Didn’t We Sell Then? Why Don’t We Sell Now?
James Stewart, author of the Common Sense column for The Wall Street Journal, recently addressed the question “When will the market bottom?” Referring to the basic premise that the past is knowable but the future is not, Stewart began by refusing to predict where the markets might be headed in the short term. However, he did suggest that even if it was known that the market had not yet reached bottom, selling equities still would be a gamble.
Because equities are a critical component of any long-term investment strategy, selling equities now would likely result in one of two outcomes: A) buying back in at even lower market levels, or B) buying back in at higher market levels. While outcome A could enhance portfolio value, outcome B would permanently destroy some portion of portfolio value.
The inherent problem with any attempted market timing, regardless of market level, is that the near-term future remains unknowable. To be successful, you have to be right twice (when to sell, then when to buy) about something that cannot be known with any certainty. As Stewart states, “You can pursue this strategy if you wish, but don’t pretend it’s anything but rolling the dice – twice.” Given that market prices can move very quickly, both on the up side and the down side, is “rolling the dice” worth the risk?
In hindsight, market events always seem clearer. But in reality, equity market volatility (caused by the constant incorporation of new information) renders it futile to attempt to forecast market events, especially in the short run. 2008 provided a glaring case in point as professional investors as a group failed to dodge the dramatic market declines. As pointed out by Fran Kinniry, senior member of Vanguard’s Investment Strategy Group, if active fund managers collectively had the ability to foresee the events of 2008, they would have been able to take advantage of that insight to outperform index funds (which simply attempt to replicate the market return). What actually happened? According to Lipper Inc., indexing enjoyed one of its better years ever relative to actively managed funds, outperforming the average equity fund by 1.80% and the average fixed income fund by more than 9.00%!
While the current uncertainty can make equity investing a nerve-wracking experience, there’s a very, very high probability that disciplined long-term investors will enjoy a successful investment experience. Yes, it is still unclear whether the market has reached a bottom. But despite the overwhelming sense of doom that the media may report, it’s important to remember that for every pessimistic seller in this market, there’s an optimistic buyer.
And though historical comparisons offer a number of encouraging signs, history need not be the only rationale for optimism. As Stewart concludes, “If you believe that the market will never recover, you should sell.” However, “that requires a complete loss of faith not just in the stock market, but in the productive capacity of all mankind.”