Market Timers Who Correctly Zig Often Don’t Zag

Monday, October 5, 2009

zig zag sign-2In spite of the well-supported advice to invest for the long-run, market timing looks smart when the market drops. As a result, in bear markets, investors’ interest rises concerning those who saw it coming. The natural reaction is to follow them closely to learn what to do next. Doing so can be highly misleading – and expensive if their advice is heeded. Here’s why…

Successful market timing requires making two correct decisions: selling at the top and then buying at the bottom – zigging and zagging. This means the forecaster of bad times must repeat his/her accuracy in predicting the return of good times.

The problem is that the mindset that got the decline right is not what’s needed to spot the subsequent rise. Instead, doomsayers keep focusing on risk – like the weatherman who forecasts a major hurricane, then continues to foresee the likelihood of more hurricanes.

I have seen this zig-right/zag-wrong situation repeated many times. Investors expecting a repeat performance are disappointed as the downside guru completely misses the upside boat. With that fact in mind, read how a Bloomberg article today begins…

New York University Professor Nouriel Roubini, who predicted the financial crisis, said stock and commodity markets may drop in coming months as the gradual pace of the economic recovery disappoints investors. “Markets have gone up too much, too soon, too fast,” Roubini said….

So, don’t follow the advice of someone simply because they happened to spot bad news coming. Instead, keep your focus on the future in which the U.S. economy is operating “normally” and investors are again focused on growth.

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