If this is not evidence of the inability of being able to accurately predict the short term direction of the stock market, then nothing is.
I left my office Tuesday afternoon, 8/31/10, to attend a non-profit committee meeting. It was 3:45 pm, shortly before the US stock markets closed for the day (and month). I turned on my Sirius radio to CNBC. I heard gloom and doom. The few Wall Street analysts said things like: no strategy is working in this market. It is not a stock picker’s market. You can’t identify a sector or sectors to successfully invest in.
Then a commercial break. The market closed at 4 pm. The day was flat, but August was a down month. They repeated all the stats. More gloom and doom. The worst August in many years for the US stock market. How should we react? Where to turn to next? Nothing is working. On and on….for my 25 minute drive.
The next day, the world changed, at least in China, and then for the US stock market and markets around the world. How could “everything” change from gloom to giddiness overnight?
The next day, Wednesday, I was moving my son up to the University of Michigan, to begin college. Mid-day, I left his new dorm to shop for some things. Turn on the radio. The Dow is up approx. 250 points! The markets end up being up 2-4% for the DAY, depending the asset class. A good portion of the losses for the month of August are erased in one day.
Is this rational? No. Why? What happened? The markets react to new news. Overnight, China reported good economic news. Then reports of better housing starts were reported.
What can be learned from these two days? For us and our clients, this is further re-enforcement of many of our philosophies, all in 2 days!
You cannot predict the stock markets or the future. No one can accurately, consistently and over a long period of time. Not even Warren Buffet.
Develop a plan for your individual situation and stick with it. Be disciplined….until your personal situation warrants a change in strategy. Your personal plan cannot be based on what you think will happen in China, Japan or anywhere else, as you cannot control those things.
This is why we recommend trying to focus on the long-term, as the markets’ short term volatility cannot be predicted or anticipated. Reacting to short term swings will not lead to a successful investment experience.
If you want security and comfort, in the long term, you have to focus on the long term and not react to the “noise” of these daily or monthly swings in the markets.
Obviously, we all want more “good” days than “bad” days. Academic research shows that the markets will provide more good than bad days (more positive returns than negative returns), but you need to have a good strategy to be able to experience these positive opportunities.