Financial Planning

Yet Another “Don’t Try to Time the Market” Lesson

This past week was yet another example of the importance of staying the course and not trying to time the market.

Close of Market – Friday, July 1, 2011: Dow Jones Industrial Average up 648.19, or 5.4%, for the week to finish at 12,582.77. Best five days’ percentage increase since July 2009 and largest five days’ points increase since November 2008.

Rewind one week: Wall Street Journal Friday, June 24th story excerpts:

“The U.S. and 27 other countries agreed to release 60 million barrels of oil from strategic reserves, temporarily driving down oil prices to a four-month low in a controversial bid to prop up the global economy. The surprise move caught investors off guard and upended financial markets. U.S. stocks dropped in volatile trading…”

“European regulators will require banks to take greater account of the possibility that their government-debt holdings may lose value.”

“New jobless claims stayed above the key 400,000 level for the week ended June 18, the latest sign that the U.S. labor market is sputtering.”

After reading the above three story excerpts last Friday, June 24th and seeing the DJIA at 11,934.58, would your Monday morning, June 27th investing strategy be: (a) Sell the market, (b) Stay put, or (c) Buy, buy, buy? Chances are, many of us would have chosen “a” and very few would have opted for “c.”

This past week was yet another example of the importance of staying the course and not trying to time the market. Historically, the largest stock market increases have come in spurts over a handful of days, often when least expected. To the extent that you’re either out of the market or not fully invested when this occurs, your overall returns will be diminished accordingly.

Given the fact that no one can consistently predict with a high degree of accuracy when these short-lived market surges will occur, and knowing that your investment returns will be negatively impacted if you’re sitting on the sidelines when they happen, doesn’t it make sense to stay invested? Assuming that you follow this strategy, while you will ride the stock market roller coaster and will experience numerous market downturns, you will also have the opportunity to participate In the key moments in time that have historically been responsible for the lion’s share of positive market returns.

By Robert Klein

Robert Klein, CPA, PFS, CFP®, RICP®, CLTC® is the founder and president of Retirement Income Center in Newport Beach, California. Bob is also the sole proprietor of Robert Klein, CPA. Bob applies his unique background, experience, expertise, and specialization in tax-sensitive retirement income planning strategies to optimize the longevity of his clients’ after-tax retirement income and assets. He does this as an independent financial advisor using customized holistic planning solutions based on each client’s needs and personality.