The following is a true story, but unfortunately, it is
not unique.
On Oct. 10, 2008, a friend of mine sold all his 401(k)
stock funds and fled to the safety of cash. The reason? In an
already reeling market, the Dow had fallen more than 2,000
points (or 22%) in slightly more than a week!
That was a Friday. On the following Monday, the market
slapped him in the face. The Dow jumped 11%. Because of one
day's fear, he had effectively added a year to his future
retirement age.
He was then left with the uncomfortable choice of:
a) Putting his money back into the market, and risking
losing that 11% a second time, or
b) Keeping his money in cash and missing out on a
potential rally.
This is only the latest object lesson in why market timing
is an excruciatingly dangerous game.
But it's a lucrative game...
Now, I know what you're thinking. The market
kept going down from there. After that 11% jump, the Dow fell
from just less than 9,400 to 6,600 by early March. Staying in
cash would have kept my friend (or any of us) from losing
another 30%.
And let's not forget about the upside. Timing the market
accurately can lead to amazing gains in very short periods to
time -- and stock selection becomes secondary. Any idiot
could have picked a stock on March 9
th(the market bottom) and posted a gain . . .
regardless of a company's industry or relative health:
Stock
Two-second description
Gain since March 9, 2009
MGM Mirage (NYSE: MGM)
Highly leveraged casino
400%
Amazon.com (Nasdaq: AMZN)
Dot com superstar
98%
UnitedHealth Group (NYSE: UNH)
Major health insurer
48%
ExxonMobil (NYSE: XOM)
Big oil
13%
Sirius (Nasdaq: SIRI)
Satellite radio
312%
Citigroup (NYSE: C)
Bailed-out bank
309%
Johnson & Johnson (NYSE: JNJ)
Consumer staples blue chip
24% Continued... |