Category Archives: Market Timing

You Know You’re in a Bear Market When…..

By Larry Luxenberg  

You know you’re in a bear market when you are grateful that the Dow Jones Industrial Average is only down 300 points. You were afraid it would be down 600 or 1,000 points so 300 doesn’t seem that bad.

You are grateful that one or two days a week, like clockwork, the stock market gives you a break and goes up.

Another sign of a bear market is when the pundits who are predicting the end of civilized society as we know it sound more sane than the ones who predict that at some point the stock market will only go down a little bit.

It’s a bear market when you are tempted to buy something and you say, Nah, it can wait a few months.

You’ve given up all hope of anything good happening ever again.

You aren’t afraid to sell something because you know it will go down further but you won’t buy anything because, what’s the point?

Keep in mind, now that we’ve established that we are in a bear market, both bear and bull markets seem to last longer than we ever thought possible and go further than seems reasonable. But it’s always darkest before the dawn.

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A Reasonable Request?

By Larry Luxenberg  

Last week a client told me that he believed a recession was imminent and he wanted to take investment actions capitalizing on that view.

At first blush, this seems to be a reasonable request. Many commentators foresee a recession as the result of the Federal Reserve’s aggressive interest rate tightening cycle.

However, this view reflects several beliefs about investing that are simply not true. One of the main suppositions is that the stock market acts in line with what is happening now. In fact, the stock market tends to take a collective view of the economy 6 to 12 months ahead and discount those future events.

In the case of this expected recession, if it’s visible now, stock market action should have discounted it last year.

Even more difficult is the idea that anyone can predict a recession ahead of time. To get an idea of how difficult it is to predict a recession consider this. Officially, recessions are designated by a group of nationally prominent economists at the National Bureau of Economic Research. One of the main indicators of a recession is two consecutive quarters of decline in Gross National Product. However, the economists look at many indicators of economic activity in determining when a recession began and when it ended.

But what’s most telling about this group of distinguished economists is that they determine the dates of a recession several years after the recession has ended and the subsequent recovery is well under way. In essence they struggle to call the recession afterwards and don’t even attempt to predict it ahead of time.

So what my client wants to do is something no economist would hazard and after he accomplishes this feat he then has to backtrack as much as a year to capitalize.

If you ask for the impossible, often you will be disappointed.

Instead, it makes more investment sense to take into account the regular occurrence of recessions and bear markets when you put together your investment portfolio. Being able to ride out these downturns without shifting positions has produced powerful long-term returns.

Over the last century, investors in the largest American companies (measured by the Dow Jones Industrial Average and the S&P 500) have doubled their returns on average every seven years. This doesn’t occur like clockwork but the longer you give it the closer you’ve gotten to these results.

When I began my investment career in 1982, the Dow hovered around 800 as it emerged from a two year double recession. Today, after a terrible period for the stock market, the Dow is almost 33,000.

That’s a great period for investors who shunned predictions and stuck with the market through thick and thin. Trying to save yourself some short-term pain is just as likely to sabotage your long-term performance as it is to help.

If there was a way to avoid the pain, I would be among the first to sign up. Instead, I do the next best thing. Put together a diversified portfolio that’s designed to prosper despite market swings and keep my investments intact as best I can.

No one knows whether this approach will work in the future but it makes more sense than trying to find a better crystal ball.

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The Law of the Jungle

By Larry Luxenberg  

The way humans have evolved over millions of years is spectacularly unsuited for investing (Think Ramapithecus and similar forebears). The events and the results of the last year demonstrate that as well as anything could.

In most environments, survival is based on quickly recognizing threats and reacting. In the stock market, the best results come from putting some thought into investments ahead of time and then ignoring threats and being patient.

In mid-March last year, in the early stages of the pandemic, the stock market had a historic two-week swoon. In that period, the stock market had three of the 20 biggest single day drops in the more than 100 years of modern stock market history.

A global disease closed economies around the world with unprecedented speed and thoroughness. In time, the pandemic turned out to be much worse in many ways than most experts predicted. Still, the economy, while not fully back, has recovered more quickly than most forecasters anticipated.

Any prudent investor could be excused for taking money off the table last spring and sitting on the sidelines until the devastation was behind us.

And that was the exact wrong thing to do.

Looking back over the last year, we have had a historic stock market rally with stocks increasing more than 60 percent in the U.S. to all-time record levels.

Within the market, we have had an equally dramatic turn of events.

As the pandemic raged, giant technology stocks, which benefited from the economic activity of shut-ins, soared. A huge percentage of the gains from spring to early fall were concentrated in a handful of stocks such as Apple, Facebook, Microsoft, Google, Netflix and Amazon. Tesla became the most valuable automobile stock in history.

And then quietly, it all changed in undramatic fashion. The big tech stocks continued to drift upwards but stocks that had under performed for a decade, the small cap value stocks, the energy stocks, real estate stocks, cruise ships and airlines surged.

These unloved, even hated stocks had one of their half dozen biggest periods of out performance in the last century and for the full year dramatically outperformed the tech darlings.

In the spring of 2020, any investor who was paying attention was ready to panic. There was no plausible explanation for sticking with the program. No story made sense. In practice, on March 23, 2020, the Federal Reserve launched the most aggressive rescue program in modern history and it worked beyond anyone’s expectations. In a shocking display of unity, the Congress passed dramatic legislation that also played a key part in reviving the economy. Into 2021, the Fed and Congress continue to do their parts to keep the economy climbing.

Despite this volatile period that no market analyst could possibly have predicted, individual investors faith in their ability to foresee stock market gloom is still undiminished. People who badly misread the landscape a year ago to their own detriment, are convinced that they see the pratfalls ahead. Surely after the stock market has risen so far so fast, it cannot keep going.

Of course, no one knows. That is the big lesson of the last year. No one knows and anyone who thinks differently is an ill-informed fool.

What we do know is that over time, if the economy does well, the broad stock market should too. Over the last 95 years, since good data became available in 1926, the broad U.S. stock market, as measured by the Dow Jones Industrial Average and the S&P 500 have increased by 10 percent a year on average. Rarely has the market gone up close to 10 percent in a year but most years it has produced positive returns and only a quarter of the time has it produced significantly negative returns.

At a 10 percent annual return, the market doubles every seven years and quadruples in 14. My stock market career began in the summer of 1982 when the Dow was at 800. Today it is above 33,000. There has never been a time in those nearly 40 years when I could not have made a case that the stock market faced significant challenges and it was prudent to be wary. And yet, the prudent thing actually was to stay invested.

If you stay invested through thick and thin, you are highly likely to be the beneficiary of powerful returns. If you go in and out of the market, your returns are likely to suffer greatly. Big gains on a handful of days power portfolios and these rare big days are impossible to foresee.  The effect has been well documented.

For several decades consulting firm Dalbar has looked at investor returns compared to the performance of the mutual funds they invest in. Generally, investors get 1/3 to ½ of the returns their mutual funds generate because they move in and out at the wrong times.

In 1996, Fed Chairman Alan Greenspan made his historic warning that the market had risen too much because of “irrational exuberance.” At the time, the Dow was at 6437.

Surely, after a period of big increases the stock market is bound to cool off. After a spell of hot temperatures, we often have a cold wave.

However, every day logic does not factor into the stock market.

Stock market researchers have crunched the numbers. After periods of strong stock market returns, the stock market has produced average returns. After periods of weak stock market returns, the market has produced average returns. After periods of average returns, a similar result.

The lesson? Don’t guess. Don’t expect that your common sense will work on the stock market. Don’t expect that you are smarter or better informed than the millions of other people focused on the stock market and paid to do so.

What should you do? Understand your situation. Figure out how much risk of a difficult period can you sustain. Understand why you are investing and when you will be spending the money. Craft a diversified portfolio. Keep your plan flexible. Above all, don’t react to events and be patient. Don’t let your adrenalin and emotions guide your investments. Understand that investing is a long game and short- term movements are noise.

Over the long term, over decades, the stock market has the potential to be rewarding if you can keep your own behaviors in check. The stock market is inherently risky but the biggest risk is you, not the market. Here is the true law of the jungle for investors. Stick in the market and hear your returns roar.

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Fat Tail Years

By Larry Luxenberg  

A fat tail in investing doesn’t describe an animal. It’s a statistic that indicates a rare but often important outcome. In investing it may mean the odds of a really good or really bad outcome.

Stock market investors are afraid of lots of things but they really should fear four things. One: The stock market has a terrible year. Two: After that terrible year, the stock market doesn’t recover for a long time. Third: The investor is out of the market when it goes up. Finally: they hit on one of the many ways to mess up their investments.

Looking at the last 95 years of stock market returns, the odds of number one and two are low — not zero — but low. In that time, the broad market has declined by more than 20 percent in only six years and by 10 to 20 percent an additional eight times. In 10 more years the returns have been slightly negative; disappointing years but not something to fear.

The rest of the time — 71 years/75 percent of the time — the broad stock market as measured by the CRSP database  has had positive returns and 58 percent of the years, those returns have been greater than 10 percent.

A 10 percent return is the long-term average for the last century and it’s a powerful return because at that rate portfolios double every seven years.

The overall message is that the odds of you messing up by overthinking the problem and doing something creative is one of the biggest risks. The odds of the stock market having a really terrible year and taking a long time to recover are low. And one risk you can control is the chance of the stock market having a good to great year and you not being involved. 

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The Price of Certainty

By Larry Luxenberg  

As children, we crave certainty and we never truly outgrow this wish. As adults we know that there is no certainty in the world but this is impossible for people to accept.

Investors fall into lots of traps because they fall under the spell of this desire for definite outcomes. In a world gripped by pandemic and economic convulsions this search for certainty is even more compelling.

When so many people are in the market for certainty, the price — paid or opportunity cost — goes up dramatically as well as steers people into the wrong products and magical solutions.

It is unfortunate that at these inflection points people can squander decades of prudence for impulsive actions that color their financial pictures for extended periods, often for the rest of their life.

It’s easy to rationalize panic but when we crawl out from under the bed, the damage has been done and it may be hard or impossible to undo that damage.

One of the most distinguished writers about the Holocaust, Primo Levi, after the war ruminated about his experiences including his time at Auschwitz, which he barely survived. He marveled that one seemingly small error, which led to his capture and deportation, had such grave consequences.

The lesson for us, in much less dire circumstances, is to tread carefully when danger lurks.

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A Pig in A Poke

By Larry Luxenberg  

Every so often, complacency sets in on Wall Street. You never know how long afterwards bad stuff will start to happen but it’s a time to be vigilant.

For me, one of the warning signs is when people start to cut big blank checks. A few weeks ago billionaire investor Bill Ackman attempted to raise $3 billion dollars to buy something. Instead, investors threw money at him and he raised $4 billion.

Ackman gave investors vague clues about what he’d do with the money but only in time will they actually find out where the money will indeed go. He would like to buy a company or two and he’ll let you know when he does.

The actual investment vehicle is titled the Pershing Square Tontine Holdings. It’s a blank check company or more properly a SPAC, a Special Purpose Acquisitions Company.

Ackman has compiled an enviable investment record and there are checks built into the SPAC structure. Still, these vehicles normally appear during bull markets and disappear in bad times when investors are more reluctant to part with their money and fund speculative vehicles.

Sometimes it can be years before there is a reckoning. Sometimes, it’s only parts of the market that suffer. Still, every time there is a global pandemic and deep recession and yet investors are eager to buy a pig in a poke, I get nervous as a cat.

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Easy Peasy

By Larry Luxenberg  

Many people think there is nothing difficult about personal finance. Listen to a few gurus on TV and maybe scan a magazine or two.

That may have once been the case (I would argue not) but it’s certainly not the case after the passage of the Secure Act last December, which was followed quickly by the CARES Act and the possible Heroes Act.

Couple that with other changes to RMDs, add in QCDs, QLACs, IRMAA (Income Related Monthly Adjustment Amounts), partial Roth Conversions, pension options, tax loss harvesting, asset allocation, tax aware investing, market timing and the Social Security formula (the simple part — 35 years of monthly inflation adjusted earnings).

If you’ve got all that, knock yourself out and do your own planning and hope you don’t run out of money in retirement (See Monte Carlo simulations).

If you can’t sort your way through that alphabet soup and want help with ETFs, ETNs, open end mutual funds, closed end mutual funds, ADRs and plenty more, how about turning to a CFP (Certified Financial Planner), CFA (Chartered Financial Analyst) or CSA (Certified Senior Advisor) or better yet someone with all three.

We don’t know all the answers, but we do know a lot of the right questions and a lot of the places to start looking for answers.

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Market Timing

By Larry Luxenberg  

The phrase “market timing” is of paramount importance to investment professionals but is difficult for most people to grasp. No matter how many times the subject is broached, most people cannot internalize the idea.

The concept comes down to this: if the stock market from time to time is going to go crazy and plunge, why don’t I just sell stocks before that and buy them back when it is safe? Why suffer those losses and that pain, when it can be avoided?

If that were possible, I would certainly sign up. But all of the evidence and my own experience of 45 years of closely following the stock market support the conclusion that only in retrospect is it possible to predict market downturns. Sometimes an investor takes action before a crash or a bull market and the media trumpets their success. But then the investor makes a second call and a third and the inevitable failure erases that guru from the scene.

A recent example was the hedge fund investor John Paulson, whose shorting of mortgage backed securities before the 2007-9 collapse was the subject of the book “The Greatest Trade Ever.” Paulson then proceeded to give much of that money back quickly with a series of disastrous trades.

The examples are endless and the academic evidence is even greater. Few investors even come close to equaling stock market returns over an extended period of time and only a handful have surpassed the market over a period long enough to be at all meaningful.

One reason that it’s impossible to time the market is that the stock market tends to move ahead of the news. Normal logic does not apply and the people who are most logical and analytical — scientists, engineers, mathematicians — have the most difficulty with this.

Over time, average market returns are powerful — in the U.S. for the last century on average the broad U.S. stock market has nearly doubled every seven years. Trying to do better leads most people to do much worse. If you take the bad with the good, you’ll get plenty of good.

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