Last week, my friend Simon emailed me in a panic. “I just read that stocks are going to crash,” he wrote. “Should I trade my stocks for bonds or cash?” He linked to a November 6, 2014 article in MoneyNews, Warning: Stocks Will Collapse By 50 Percent. Even the hearts of stoic investors skip a few beats when reading such headlines. Why wouldn’t they? Nobody wants to lose money. And watchful experts have stethoscopes on the heart of the economy. If they’re predicting a market crash, we should listen, right?
Somewhere, somehow, such headlines get published every single week, of every single year. Steve Forbes, editor-in-chief of Forbes magazine once said, "You make more money selling advice than following it. It's one of the things we count on in the magazine business -- along with the short memory of our readers."
Most predictions prove to be wrong. But don’t take my word for it. Start tracking stock market forecasts. When experts in the Wall Street Journal or CNBC say stocks are going to soar or crash, record what they say. See if they prove correct. Most won’t.
Between 2005 and 2012 CXO Advisory collected 6,582 forecasts, offered publicly by experts predicting the direction of the U.S. stock market. They were right just 46.9 percent of the time. A Kindergarten class could have rivaled them.
Some people do pull out of the stock market when they expect a huge drop. Others pour money in (often selling bonds to do so) when they expect stocks to soar. This is called market timing. John Bogle, founder of the Vanguard Group says, “After nearly 50 years in this business, I do not know of anybody who has done it successfully and consistently. I don’t even know of anybody who knows anybody who has done it successfully and consistently.”
Here’s an example. On December 19, 2007 Businessweek gave guidance for 2008. They polled seven analysts. All of them predicted stocks would rise that year. But they didn’t. The S&P 500 dropped 38 percent. So, did anyone nail the crash of 2008? Reportedly, hedge fund manager Mark Sptiznagel did. But was it luck or skill? Those following him since have reason to wonder.
The S&P 500 has gained 233 percent since its low in 2009. Spitznagel didn’t forecast such a rise. On June 16, 2011, Business Insider published, Meet Mark Spitznagel: The Hedge Fund Manager Betting $6 Billion on a Doomsday Scenario.Courtney Comstock wrote, “Mark Spitznagel is losing tons of money every day running Universa, his $6 billion hedge fund.” She added, “Spitznagel's fund is currently betting that a huge disaster is coming-- that will cause the S&P to fall 40 percent.” Spitznagel, it seems, was losing money while the markets surged.
And that trend continued. On September 24, 2013, The New York Times writer Alexandra Stevenson published A Hedge Fund Manager Who Doesn’t Mind A Losing Bet. She wrote, “According to one person familiar with the firm, its [Spitznagel’s] funds are down around 2 percent this year.” In 2013, the S&P 500 gained 32 percent.
From 1994 to 2014, U.S. stocks averaged 9.22 percent per year. At this rate, $10,000 would have grown to $58,332. But stock markets dip, dive and surge. Most of the gains come from a few big days. What if, instead of staying fully invested, you had pulled money out to try timing the market?
According to JP Morgan Asset Management, those missing the top 10 trading days would have earned just 5.47 percent from 1994 to 2014. Those missing the top 20 days would have averaged 3.02 percent. And those missing the best 40 days would have actually lost money. Remember this, the next time a headline yanks at your heart.
Impact Of Being Out Of The Market
$10,000 invested in U.S. stocks
December 31, 1993 to December 31, 2013
|Commitment To The Market||$10,000 Grew Or Dropped To:|
|Missed the 10 best days||$29,111|
|Missed the 20 best days||$18,140|
|Missed the 30 best days||$11,984|
|Missed the 40 best days||$8,146|
|Missed the 50 best days||$5,697|
Andrew Hallam is a Digital Nomad. He’s the author of the bestseller Millionaire Teacher and Millionaire Expat: How To Build Wealth Living Overseas