Save Money, Seniors Save Money in Traverse City with Protect Your Profits

Jerold Foehl
Investment Advisor Representative
Brookstone Capital Management

"Why not bail out of stocks for the relative safety of high-yielding CDs?" A few months ago, that was a common question from investors grown weary of the market's nerve-racking ups and downs. Now that the Dow has hit new highs, those who made such rash moves are likely kicking themselves. Like many before them, they fell into the single biggest trap in investing: trying to time the market.

At Senior Security & Associates, we believe the most important decision you make with your portfolio is your strategic asset allocation and sticking with it is key to long-term success. We strongly advise against making market-timing bets. But if you must, then it should be with just a small portion of your portfolio.But couldn't large shifts in your asset allocation improve your portfolio return? Theoretically, yes, assuming you could time market shifts correctly. The problem is that doing so consistently is close to impossible. Here's a look at why trying to beat the odds could deep-six your long-term investment plansand a smarter alternative to consider.

•Market bursts. The main factor working against market timing is that stock gains often come in quick, intense bursts. Miss enough of them and you lose all of the long-term advantages of owning stocks. Remember 2004? It was a good year for stocks, with the S&P 500® index returning 10.9%. However, the rise was hardly smooth. As the "Shock Treatment" graph below shows, from January through October 25 of that year, the S&P 500 was actually slightly down. Three-quarters of 2004's return came in the following 14 trading days! Predicting such sudden market turns requires an impossibly high degree of accuracy.

•Opportunity lost. The opportunity cost can be substantial if you miss the best days by staying on the sidelines. Over the last 10 years ending June 30, 2006, missing the best 10 days of the S&P 500 (that's 10 out of 2,517 total trading days) would have reduced your annual return from 8.3% to 3.3%even less than the return of risk-free 30-day U.S. Treasury bills. Adding transaction costs would have reduced your return even further.

•The pro's predicament. For market timing to be an effective investment strategy, you have to be right twice: once when you sell to exit the market, and again when you buy to re-enter. Being correct on the first call is challenging, but twice in a row is even more difficult. Although professional market timersthose who offer informed buy/sell advice to their clientsoften claim success, decades of research have found little theoretical or empirical evidence that active market timing works. Indeed, a study that analyzed the five-year performance of 25 experienced professional timers found luck to be just as important as the timers' skill in determining performance results. And while market timers can reduce portfolio volatility (simply by being out of the market for periods of time), researchers have found no evidence that they consistently boost returns.

•Upward instinct. Since 1926, the S&P 500 has had a positive quarter 68% of the time. Just 16% of quarters had declines greater than 5%. As the graph belo