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We have all heard market pundits at various times announce that they have exited the market and have gone to cash. These folks are market pros and command a following either through their own proprietary newsletters, as commentators on TV, or through some similar medium. And since they are pros, they have the training and experience in the market to time their entrance and exit points. At least, that's what they represent to the small retail investor trying to figure out what to do with their own retirement accounts.

Setting aside the issue of market timing and whether even market pros are, or are not, successful at it, a more pertinent question is whether these pros who claim to be "out of the market" have actually liquidated all of their holdings gone to cash as represented. A recent example of this is market guru Dennis Gartman, who a week or so ago (February 26, 2013) went on CNBC stating: "it's time to sit out the stock market"; "cash is not such a bad thing to hold"; and "I'm on the sidelines and happy to be there."

Does he actually mean he has sold all the stocks and mutual funds in his own retirement accounts? Admittedly, I'm assuming that even pros, who may be market timers and traders rather than investors, have 401(k)s, IRAs and taxable investment accounts. So when they say they have exited the market, do they really mean they have sold off all of their investments?

It's not unreasonable to assume that these pros have some significant net worth. They are apparently successful enough to be invited on TV to express their opinions, and often are the authors of newsletters which are subscribed to by both retail investors and institutions. Given that degree of success one might expect their personal accounts (retirement and otherwise) to hold high dollar amounts of assets - in the hundreds of thousands or millions of dollars. So when the market gets to a point where they say they are stepping to the sidelines, I have to wonder if they are really going into their personal accounts and selling all the mutual funds and stocks they own. Imagine going in one day to your accounts and selling a million dollars (if you had it) of your market holdings. Do they really do that?

The truth is: I don't know. But I do find it a bit hard to believe. So what should you think when you hear a market pro say they have exited the market? I suspect, and you should too, that they may be nervous enough to have been spooked into selling all of their "trading" positions but I am highly doubtful they have gone into their personal "investment" accounts, particularly retirement accounts, and sold all of their investments to cash. You should be doubtful too, and resist the temptation.

There is, of course, a big difference between trading and investing. An investor has a long term time horizon and has years to wait out dips and bear markets. Investors are not typically market timers for some very good reasons:

  1. Few, if any, are good at it;
  2. The market has a habit of fooling even the pros;
  3. Market timers tend to get whipsawed, getting out when fearful after a steep decline, and then jumping back in after the market has snapped back unexpectedly - or worse, missing the move back up and never getting back in; and
  4. The nature of investing, not trading, is long term (meaning years) and success is not predicated on correctly guessing which direction the market will go in the next weeks or months.

So how should you be positioning your accounts when a market pro says they are out or getting out? If you are an investor I believe you are better advised to to simply wait out a market downturn. If you still like the companies or funds you own, look to add to your positions in the downturn and wait for the market to return. History shows it will.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Source: What To Think When A Pundit Says, 'I'm Out Of The Market'