So You Think You Can TIME THE MARKET? Part II

In the last email I made the case that it is literally impossible to time the market given the fact that no warnings are given ahead of time and that the big changes are so furiously sharp that you are bound to miss the best periods if you try to act right when change seems to hit.

Statistically, timing the market is nearly impossible, but the reality of the matter is much worse than “nearly.”

This morning as I was waiting in a doctor’s office (our three month old had three shots today), I stumbled upon the “Money and Investing” section of the Wall Street Journal. The article that caught my eye was titled “Gross’s Fund Hit by More Outflows.” Bill Gross may not be a name you recognize, but his bond fund, called the PIMCO Total Return Fund, likely is. PIMCO is the world’s largest BOND fund, and Bill Gross has been its Chief Investment Officer (CIO) since he co-founded the firm in 1971. The article explains that “$3.1B have come OUT of the fund in March alone, marking the 11th consecutive month of outflows.”

And CNBC adds that “While PIMCO has shed assets both in 2014 and over the last year, the Newport Beach, Calif., firm has plenty of company. Many of the most prominent bond mutual funds have lost billions of dollars in assets over the last year, including those managed by DoubleLine Capital, JP Morgan Chase, American Funds, Vanguard Group and Fidelity Investments according to data estimates from Morningstar.”

Why would this be happening? Why is so much money coming out of bond funds right now, and where is it going?

In the same article, Eric Jacobson, a Morningstar bond expert, sheds some light on a possible answer to these questions:

“It’s been a really rough stretch for traditional bond managers, especially those that don’t have alternative products to soak up the assets that have been coming out of traditional core funds.” 

There are at least two pitfalls in that statement, and the average investor is falling prey to them when they use the average institutional investing process.

First, remember what the prudent investor does during a 12-month period like the last one. We’ve seem almost no return in Bonds (PIMCO’s most recent 12-month return was 0.75%). And we’ve seen HUGE gains in equities. When this happens, the prudent investor rebalances (we do this on behalf of our clients), which means they sell off the gains in equities and purchase bonds which have not risen much. In other words, they sell the higher assets and buy the lower ones.

But the average investor, acting on emotions and instincts, has been doing just the opposite of prudent. Millions of investors in the past 12 months – LONG AFTER the stock market has fully recovered – have removed billions from Bonds. It can’t be proven what every investor has done with them, but based on the stock-market performance the past year, it’s extremely likely that much of that money is being invested there. Get this: the bulk of the move back into the market by investors who were scared out of it in 2008 and 2009 has been happening in the past 12 months. This is exactly the wrong time to have made this move. Yet now is when most investors, left to themselves, FEEL comfortable with the stock market again. It is way too late now to hope for anything nearly resembling the gains available to the disciplined investor who simply remained disciplined and rebalanced through the dips and highs.

And secondly, did you catch the part about “soaking up the assets”? First of all, these are not “assets to be soaked up”! This is your money. From comments like this, it’s clear that the generally accepted pathway back into the market by the industry’s largest firms is to wait until you feel more comfortable and then allow you to bring your bond investments back into something you are more comfortable with. The firm will be glad to inform you of their solid performance since 2008’s crash in myriad other options. A few of their options will even have beaten the already huge market returns during these past five years. All you see are green up arrows, so you jump back in.

You think you can time the market? Do you have a reason to think you have an edge on the average investor who is right now making some of the most destructive moves of their investing lives?

This is precisely why I’m hosting “Love the Bear Market” right now. I have no idea when the market will CRASH again. I’m not expecting it this year necessarily, but I’m always expecting it. The investor who faired the best during the last market crash is the one who learned to Love the Bear BEFORE it showed up.

Learn to Love the Furry Fella with us on April 22nd.




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