Snow and Market Predictions
As originally appeared in The Jerusalem Post on January 27, 2022.
“Would you bet your paycheck on a weather forecast for tomorrow? If not, then why should this country bet billions on global warming predictions that have even less foundation?” – Thomas Sowell
Hooray, it snowed in Jerusalem. After much anticipation and some false alarms, we were fortunate to have around 15 cm. (six inches) of the white stuff. Everyone had fun making snow-people, throwing snowballs, and generally going outside and walking around. Special kudos to my youngest daughter who decided to cast tradition aside and make a snow pig! While it was a valiant effort it actually came out looking more like the Golden Calf! Oops. At least it didn’t cost us any jewelry.
It’s amazing to me that as soon as it snows people are just happy. While walking home Wednesday night in the snow, people were out taking pictures and chatting with total strangers. It was such a fun experience. After last week’s false prediction, at least this time the weatherman got it right.
While we were getting ready to go out and play in the snow one of my children looked up from their phone and asked me if it was going to snow again. I was stumped. I mean there is a pretty good chance that it will snow again sometime in the future, but maybe she was talking about the rest of the winter.
I answered, “Who am I, Matan Yaakov from channel 12?” I got that teenager look that meant that I am old, and not funny.
Bad feeling
Recently I have spoken to a few prospective clients who told me that they have money to invest but want to wait because the market is “high.” This is actually that’s quite commonplace.
Especially after the market drops and I speak with clients about maybe investing some of the money they have sitting around in cash, I often receive responses like “I have a bad feeling about the market” or “I want to make sure that the market is going up before I invest.” This leads to an issue that I have mentioned numerous times, and that’s that investors who try and predict the future, or in investing parlance “timing the market” usually end up with lower returns than investors who stay the course and are fully invested.
As I have mentioned before, Humphrey Thomas, CEO of HG Thomas Wealth Management, writing for CNBC.com said, “Longer-term approaches are a better strategy. JP Morgan compiled some research showing the importance of this. They tracked the performance of a $10,000 investment in the S&P 500 over a 20-year period. It showed a healthy average return of 9.85% per year.
They modeled what would happen if the investor withdrew from the market temporarily and missed the 10 biggest days on the stock market for that 20-year period (just 10 days out of 7,304). The result was a reduced return from 9.85% to 6.1%, which means a decrease of $32,665 in gains. And the more days missed, the lower the gains fell.”
Thomas then continues and brings an incredible statistic: “Nobel laureate William Sharpe found that ‘market timers’ must be right an incredible 82% of the time just to match the returns realized by buy-and-hold investors.”
The 82% hit rate is virtually impossible to accomplish. If most professionals can’t even come close to that kind of success rate then a retail investor has almost no chance. You might be right once or twice, but that’s as much success as you will achieve.
Just like weathermen can’t predict what the weather will be, so too, market timers can’t continuously predict the direction of the market. The tried and tested way to make money in the market is to be in it for the long term. I hate cliché’s but in this case, there is a good one about the way to make money by investing.
“It’s time in the market, not trying to time the market.” Before investing, figure out your goals and needs and then create a portfolio that will enable you to achieve whatever it is that you are trying to accomplish financially. Then allocate the money accordingly and that will help you manage risk and ease the market roller-coaster. That is a much better formula for success than trying to predict the future.
The information contained in this article reflects the opinion of the author and not necessarily the opinion of Portfolio Resources Group, Inc. or its affiliates.
Aaron Katsman is the author of Retirement GPS: How to Navigate Your Way to A Secure Financial Future with Global Investing (McGraw-Hill), and is a licensed financial professional both in the United States and Israel, and helps people who open investment accounts in the United States. Securities are offered through Portfolio Resources Group, Inc. (www.prginc.net). Member FINRA, SIPC, MSRB, SIFMA, FSI. For more information, call (02) 624-0995 visit www.aaronkatsman.com or email aaron@lighthousecapital.co.il.
