You can't time the mar­ket

The Pak Banker - - OPINION - Me­gan McArdle

AS I write this col­umn, the S&P 500 was down al­most 3 per­cent from its Fri­day close -- or, for the op­ti­mists in the room, up more than 2 per­cent from its morn­ing bot­tom. One is tempted to send the mar­ket a gen­tle note invit­ing it to re­ally spend some time get­ting to know it­self, maybe work through some is­sues in ther­apy, chan­nel its highs and lows in a pro­duc­tive di­rec­tion.

The prox­i­mate cause of this chaos is the melt­down in the Chi­nese stock mar­ket, which has prompted a global sell­off in fi­nan­cial mar­kets. You fi­nan­cial pros prob­a­bly have a lot of im­por­tant ques­tions. Does this her­ald a Chi­nese re­ces­sion, and if so, what does that mean for the rest of the world's ma­jor economies? If Amer­ica's econ­omy slows down, how much room will the Fed have to loosen af­ter seven years of hold­ing in­ter­est rates to the zero lower bound? What does this tell us about the lim­its of both fis­cal and mon­e­tary pol­icy in the face of long-term real shocks and struc­tural weak­nesses in the un­der­ly­ing econ­omy?

But this is a mar­ket move so big that even those of you who are not fi­nan­cial pros are ask­ing more pro­saic ques­tions. Like "What does this mean for my 401(k)?" Luck­ily, we live in the In­ter­net age, and you no longer have to wait for a quar­terly state­ment, or call your bro­ker in a panic. You can log on right now and look. My ad­vice is: Don't. Un­less maybe you're plan­ning to re­tire to­mor­row. Are you plan­ning to re­tire to­mor­row? I don't mean "soon." I mean, are you plan­ning to re­tire on Aug. 25, 2015? Be­cause if not, there's no rea­son for you to be look­ing at the day-to-day move­ments in your 401(k). You prob­a­bly lost a lot of money in the last week. And you know what you can do about that? Noth­ing.

Oh, sure, you could try to time the mar­ket by selling now, wait­ing for it to bot­tom, and buy­ing back. A lot of peo­ple get rich do­ing this in nov­els, par­tic­u­larly nov­els set in the Great De­pres­sion. You know why they're able to do this? Be­cause the au­thor gets to cheat; they have the prices right there in front of them, and they can whis­per them to their char­ac­ter, maybe along with a plau­si­ble ra­tio­nale as to how they should know this is the top, and then rec­og­nize the bot­tom when it comes along. In the real Great De­pres­sion, a lot of peo­ple took a bath at­tempt­ing this strat­egy, be­cause what they thought was the bot­tom turned out to be a tem­po­rary pause be­fore the mar­ket dropped into the base­ment, then got out a pick and a shovel and started dig­ging through the bedrock.

Ah, but fi­nan­cial pro­fes­sion­als will protest that many peo­ple in their in­dus­try do sell into a crash and then pick up as­sets on the cheap. True, though my ex­pe­ri­ence is that you are more likely to hear about the times this was a win­ning strat­egy than the times when it was not. More im­por­tantly: Are you, dear reader, a fi­nan­cial pro­fes­sional who spends all day glued to the mar­ket data feed, watch­ing for the bot­tom? Or are you the sort of per­son more likely to park some cash in your trad­ing ac­count in prepa­ra­tion for that golden mo­ment to buy ... and then for­get about it for six months be­cause Mom had a nasty bout with pneu­mo­nia right af­ter you had to shep­herd Ju­nior through the col­lege ap­pli­ca­tion process?

At­tempt­ing to time the mar­ket, like most other ac­tive trad­ing strate­gies, pro­duces at best a mod­est pre­mium that roughly pays for the work needed to gen­er­ate the ex­cess prof­its. (At worst, you lose much more in herd be­hav­ior and trad­ing fees than you gain in value.) But that's for peo­ple who do this for a liv­ing. The odds that you, who have so many other things to think about, are go­ing to wade into the mar­ket and out­per­form the pro­fes­sion­als are ap­prox­i­mately the same as the odds of you get­ting up out of your arm­chair, wan­der­ing down to the near­est ma­jor league sports arena, and out­per­form­ing the folks on the field.

That's why all the best fi­nan­cial ad­vice is to buy broad mar­ket funds and then just hold them. I've in­ter­viewed a fair num­ber of fi­nance pro­fes­sors over my years as a colum­nist. These peo­ple spend their lives study­ing how to make money in fi­nan­cial mar­kets. You know what they do with their nest eggs? That's right, all the ones I've ever talked to had the over­whelm­ing ma­jor­ity of their money in the same bor­ing Vanguard or TIAA-CREF in­dex funds. As you get older, you can shift more of your in­vest­ment port­fo­lio to­ward bonds, which of­fer lower but more sta­ble re­turns.

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