Fleeing Investors Miss Benefits of Sucker's Rally

I can't tell you the number of people I know that yanked ALL their money out of anything equities during the month of March which, looking back, was the worst possible time to do so in perhaps their entire lifetime (if you're reading this, I'm not judging you, but using as a teachable moment). The downward market move was fast and furious, and it certainly shook out a lot of investors. Traders that got it right - well, good for them - but they pretty much all work at Goldman Sachs (GS) - and most of the people reading this don't. However, for what should be long-term investors in 401K plans and other retirement accounts with a 20-30 year investment horizon, what logic is there in going to 100 cash or bonds in an account with so long to go?

Market Timing - How Good Are You?

As a lay retail investor (which, admittedly, I am too), you have to ask yourself - can I forecast an epic rally or decline and time switches in and out of stocks over 30 years any better than the next guy? In my trading account, I employ all kinds of exotic investing strategies, buy some individual stocks that I think will outperform (like Apple (AAPL)), sell covered calls for income, hedge my energy expenses and more. Occasionally I do catch a good trend, identify a momentum stock and sit back and collect premiums when I sell options (see how Options Work for a primer). However, that's my trading account, and it represents a fraction of our overall net worth. My 401K, IRA and 529 plans are all set on autopilot - 100% equities. Now, I do have a fair amount of it in international ETFs, and other diverse ETFs like energy, small cap, large cap, etc. But my investment timelines are such that I want to maximize my returns over that 15-30 year period instead of dilly-dallying in 1% annual returns in a money market when inflation kicks up to 5% or more per annum.

Call Me Sucker

A few months back, the then-35% rally from the bottom was widely referred to as a Sucker's Rally. The esteemed investor/professor Roubini was calling for another massive crash that never came. I had said, for 35% since March, Call Me Sucker. That article was syndicated in a few spots and lambasted for "pushing stocks" when they were sure to decline. Right around that time, articles were circulating about how US Treasuries had actually outperformed stocks over a 30+ year period (when you conveniently pick the absolute worst decline in recent history for stocks and go back to the best time to buy bonds decades earlier, during a time that we had double-digit inflation mind you, it isn't difficult to convey startling conclusions). Well, I sold Treasuries Short and made some easy money around that time - and I also held my ground in stocks and started buying in force in March right at the lows after unloading my hedges on the way down to generate cash. The Treasury outperformance was a convenient cherry-picked timeframe that is no longer accurate given the market's resurgence and the retreat of Treasuries. Well, that Sucker's Rally has now produced further double-digit gains - the market is up 55% since the March lows.

Comments

[brea:]

you wrote this article to tell us how smart you are?
very impressive! write back in 6 months and tell us
how you did it again, can't wait.
fascinating, riveting, keep us posted

Sep 18 08:17 AM

[Everyday Fi...:]

No; it was to force people who are sitting on the sidelines in retirement accounts with 20+ year rime horizons whether they are really doing what's best for their long term prosperity. Also to highlight the difference between a trading account and a retirement account. If you follow Everyday Finance, there are plenty of articles on investment mistakes I've made and bonehead moves I've made in my personal finances.

Sep 18 10:06 AM

[postaldaytr...:]

I would also add that if individual investors do feel they need to make a move to sleep at night that they make moves in small 10% to 20% increments in their 401k or IRA. I lightened up a little in equities last October and loaded up on equities this March and was able to squeeze a few extra percentage gain in my retirement accounts.

Sep 18 10:59 AM

[Nadeem Walayat:]

I wrote in Mid march to ignore corporate earnings - in the article</p>
<p><A href="www.marketoracle.co.uk...">Stealth Bull Market Follows Stocks Bear Market Bottom at Dow 6,470</A></p>
<p>Quote - </p>
<p>Yes I am aware of the on-going corporate earnings contraction forecasts that SUGGEST stocks should be going MUCH lower, though some of the estimates of where the market should be heading to are pretty ridiculous, were talking ridiculous price levels of as low as DJIA 400! However the stocks bull market was also elevated to Dow 14,000 on the basis of corporate EARNINGS forecasts that suggested that Stocks should go MUCH HIGHER. So what does that tell you ? <STRONG>It tells you that what you tend to read is always suggestive of the JUNCTURE being FAR AWAY, NOT imminent</STRONG>. <SPAN class="style1">IT IS ONLY LONG AFTER THE FACT, AFTER MARKET'S HAVE ALREADY MOVED THAT THE JUNCTURE IS RECOGNISED AND ANALYSIS PRESENTED AS TO WHAT WENT WRONG WITH THE SCENERIO THAT CALLED FOR MUCH LOWER PRICES. </SPAN></p>
<p>Similarly wide spread consensus today exists for SHARPLY LOWER CORPORATE EARNINGS going into 2010 THAT MUST MEAN MUCH LOWER STOCK PRICES. However this earnings analysis that is so abundant today, should have been presented OVER A YEAR AGO ! in October 2007 I.e. at or near the market peak! So that ordinary investors could actually ACT on the information. NOT NOW AT THE MARKET BOTTOM ! We are again seeing REASONS as to WHY INVESTORS should avoid investing INTO the Stealth Bull market!, precisely as we all witnessed what was effectively Bullish propaganda during the final stages of the Stocks Bull Market, so we are NOW witnessing what is effectively BEARISH propaganda in the final stages of the Bear Market. Now, don't get me wrong, I am not saying that the analysis is not genuine, what I am saying is that IT IS IRRELEVANT! As it is always much easier to build a scenario in favour of a trend that has been in force for sometime that has generated much data and analysis in support of why it exists and therefore it should continue for much longer, then to <SPAN class="style1"><... <STRONG>Out side of the Box"</STRONG><... to disregard bearish data that has been magnified by the growing consensus that really should have been known more than a year earlier in favour of the technical picture that as the analysis of <A href="www.marketoracle.co.uk...">October 2008</A> stated, that <SPAN class="style17"><... we are NOT heading for a Great Depression</SPAN> (as I will further elaborate upon in the Q&amp;A below) and<SPAN class="style17"> b. The stocks bear market HAS fulfilled its bear market objectives in terms of price and time</SPAN>, more than anyone could have been imagined a year ago!</p>
<p>But now, even after the stock price wipeout to below Dow 6,600. The analytical weight bearing down of overwhelming information is that in support of a continuing meltdown for even as long as several more years towards Dow targets such as 4,000 or even as low as 400 by what can only be termed as perma-bear psychology. Remember Dow 14,000, NO ONE PAID ATTENTION to the perma-bears at that time. As the market was firmly in grip of the perma-bull psychology which was eyeing Goldilocks levels of 18,000. There were even calls that China's SSE at 6,000 should go much higher, despite being on a P/E of about 60. The uber bullish media played on the fact that the NASDAQ peaked on a P/E north of 100, so much for the earnings factor! In fact I pointed out in November 2007 that investors should get out of china AT SSE 6,000 and to forget SSE 9,000, its going straight down towards an initial target of 4,000. Instead today earnings is brought to the fore to support a further collapse of stock prices to what is commonly referred to as reversion to below the mean, <SPAN class="style1">AS AN EXCUSE TO FALL FOR THE TRAP OF PERPETUATING A DISTANT JUNCTURE BOTH IN TERMS OF PRICE AND TIME</SPAN>. Therefore repeating the same mistakes that occur at ALL market Junctures ! Which is DATA is PUT AHEAD of PRICE ! To which my answer is this - What are you trading ? Are you trading the Corporate Earnings Data or the actual Stock Index ? </p>
<p>The only thing that actually matters is the PRICE ! NOTHING ELSE! and I mean NOTHING ! Not earnings, Not fundamentals. Listen to the PRICE or you WILL miss the Stealth Bull Market! </p>
<p>&nbsp;

Oct 04 09:56 AM