Tuesday, April 28, 2009

Missing the early bull market can be costly.

The bull-market versus bear-market-rally debate has been going on for a while. A few analysts have been advising caution and riding out the current uncertainty, suggesting investments in gold, TIPS or some fixed income /cash variant. For instance, this Yahoo video featuring John Mauldin has him suggesting that new bull markets go on for years and years (suggesting we’ll have plenty of time to be sure). Thus it’s better to be a few months late than a few months early.

Here’s what he says:

The great bull markets last for decades, so you'll have plenty of time. Those who bought at "the bottom" in 1974 had to suffer through the rest of the 1970s. So stop sitting on the edge of your seat waiting for that perfect moment to buy and just remain cautious for a while.

Well, maybe not. Here’s a few facts courtesy Fidelity:
  • While bull markets have often lasted for multi-year periods, a significant portion of the gains have typically accrued during the early months of a bull market rally.

  • Within six months, more than one quarter (27%) of an entire bull market’s performance (on average) was already in the books.

  • The first 12 months of the average bull market has provided more than 40% of an entire bull market’s price appreciation, yielding on average 45% for investors.

  • Those who choose to re-enter after a few months of positive performance—when the climate feels “safe”—may miss a sizable portion of a bull market’s overall gain.

Here's a chart showing the huge returns in the first few months of a new bull market.

Investing from the mid contraction point versus the mid expansion point can lead to very different results.

At the beginning of this bear market, when sentiment was bullish and this was just a bull market correction, charts like this were all over the place, warning investors against trying to time the markets. It’s a telling sentiment indicator that one does not hear too much from the long term buy-and-hold investors. This bear market has been hard on investor psychology.

Stock markets reward investors precisely because the investors are willing to invest despite the uncertainty. Hence the equity risk premium. In fact, if you miss the beginning of a new bull market, investing in bonds will outperform buy-and-hold indexing over the economic cycle.

Market timing is hard! Precisely because you need to get it right twice: knowing when to sell, AND when to buy back. Investing for the long term during volatile times like these feels hard. But this is exactly when one needs to be focusing on the long term.

No comments:

Lunch is for wimps

Lunch is for wimps
It's not a question of enough, pal. It's a zero sum game, somebody wins, somebody loses. Money itself isn't lost or made, it's simply transferred from one perception to another.