Set forth below is the text of a comment that I recently posted to the discussion thread for another blog entry at this site:
If everyone has emotions, than that is not the issue. The difference comes down to decisions. Market timers think they can beat the market. Buy and holders know that the market is unpredictable in the short term, but grows in the long term. Buy and holders know that market timing has never had a successful outcome. Buy and holders know that the market has always gone up the the long run and if they don’t do anything based on emotions, they will have a successful retirement. I have $6 million+ as my proof. Your outcome is a depleted savings account. Results matter.
Yes, market timers believe that they can beat the market. They beat it by maintaining their rationality in the face of insane emotionaliism in the market, which is always temporary. If you were looking to buy a car that had a market value of $20,000 and you happened to stop in to a particular dealer who said that he would sell you the car for $60,000, you would be wise to engage in timing of your purchase. The smart thing would be to wait for the dealer to realize that he is not going to be able to sell the car for that price and to go with a more reasonable price. When he agrees to sell for a sensible price, your smart move would be to buy. By timing your purchase, you get a far better deal for your money.
Market timing has of course had ONLY successful outcomes. The entire point of the Bennett/Pfau research was to show that. For the entire history of the market, market timing (price discipline!) has dramatically diminished risk while also dramatically increasing return. Investor heaven! Common sense tells us that market timing/price discipline must always work. And the past 41 years of peer-reviewed research CONFIRMS that what common sense tells us must be so in fact really always has been so. Refusing to practice price discipline (that is, following a Buy-and-Hold “strategy”) always subtracts, it can never add.
We agree that the market is unpredictable in the short term and we agreed that it always goes up in the long term. Where we don’t agree is that I say that an investor should aim to keep his risk profile stable over time. In a world in which valuations affect long-term returns (the world we live in!, it is not possible to do that without being willing to engage in market timing. Keeping one’s risk profile constant over time always produced better long-term results. It is not even possible for the rational human mind to imagine how it could be different.
Markets set prices properly. That’s their core purpose. When millions of investors become unwilling to practice market timing/price discipline, it becomes impossible for the market to set prices properly. It becomes dysfunctional and we see price crashes and economic crises and an increase in political frictions. Not good. We should permit honest posting re the last 41 years of peer-reviewed research at every site on the internet, without a single exception.
My sincere take.
Rob
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