Investors learned firsthand in the 1980s that it’s usually smart to stick. Just 22 months after the ‘87 Crash, stock prices were exceeding their previous peaks. It took only nine months to erase the 1990 slide. History, too, supports buy-and-hold. If you’d held every stock in Standard & Poor’s 500 Stock Index over every five-year period since 1926, and reinvested the dividends, you’d have made money 89 percent of the time, reports Ibbotson Associates in Chicago. So quit worrying about your mutual-fund investments and worry about Bosnia instead.
But markets have a way of confounding any widely held belief. In the drubbing of 1973-74, stocks lost nearly 50 percent of their value–then zigged and zagged for almost 10 years before moving decisively ahead. During that time, the S&P companies paid buy-and-holders an average of 5 percent annually in dividends. For higher returns, investors tried to time the market: buying on zigs, selling on zags, seeking to crack the cycle’s secret.
No one pays much attention to market timing when stock indexes keep hitting new highs. But if gains flatten out, opinions may change. “The current popularity of buy-and-hold will be assigned to the scrap heap by the time the next bear market has inflicted its damage,” says a hopeful Dan Sullivan, editor of The Chartist Mutual Fund Timer in Seal Beach, Calif., and, for the present, a bull on stocks.
The professional market timers’ pitch goes straight to a layman’s weakest point. “You can’t really buy and hold,” they say. In a drawn-out bear market, your nerve will break. You’ll eventually sell, then compound your loss by not buying back when prices turn up, Or you’ll switch your payroll-deduction plan away from stocks and into a money-market fund. Or you’ll put off making an investment because the moment feels wrong. All investors are timers to some degree. The more they worry about a downturn, the greater the urge to take money out. Two problems. First, you may be wrong. Second, you’re probably overrating what even good timing can achieve.
True market timers follow dozens of technical indicators that resist explanation in ordinary English. Scores of these services exist, all attempting to guess when various markets will rise and fall. Studies have shown that timing in general doesn’t improve investment results; it produces about the same returns that clients can get from buy-and-hold. What timing can do is lower your risk. You’ll lose less money if you’ve taken a step away from the market while it declines. The price is a smaller gain on the upside, from not having been completely invested at the moment the market turned. This combination-fewer losses on the downside, lower profits on the upside may yield only average performance overall. But it’s restful to be out of the stocks on their vilest, most discouraging days.
You’re out, that is, if the timing works. What makes horse races and stock markets is that the top strategists disagree. They look at the same range of indicators and apply the same types of technical tests, then draw opposite conclusions. Take stocks today. Steve Leuthold of The Leuthold Group in Minneapolis expects “a normal bear market with a 25 to 30 percent decline in price.” Norman Fosback, president of The Institute for Econometric Research in Ft. Lauderdale, Fla., predicts a flat market “with tremendous risk of being much worse.” Lehman Brothers’ Elaine Garzarelli, a raging bull, thinks the Dow will rise from last week’s 3650 range to “around 4000 next spring, on low interest rates and slow but steady growth.” Marty Zweig of The Zweig Forecast in New York is cautiously bullish, as is Smith Barney Shearson’s Alan Shaw. But Oppenheimer’s Michael Metz thinks “cash is more attractive than both stocks and bonds.”
All of these excellent analysts are often right but not every time. Says Ibbotson’s Laurence Siegel, “In a market that’s not trending up, a buy-and-hold strategy will lose relative to some market-timing strategy, we just don’t know which one.”
If you’d like to try a timing service, past performance is your only basis for choice. But take no advice from timers with uncheckable records, which assuredly includes the hustlers you hear on financial-talk radio or cable TV. Newsletters are different. You can often find their past performances in The Hulbert Guide to Financial Newsletters (574 pages. Dearborn Financial Publishing $27.95).
A handful of newsletters have outguessed the market with some regularity. Among them: Fosback’s Market Logic, which offers a stock-allocation system focused on major market turns; Curtis Hesler’s Professional Timing Service in Missoula, Mont., and Michael Burke’s Investors Intelligence in New Rochelle, N.Y., both of which trade somewhat more than Fosback does; and Gerald Appel’s Systems and Forecasts in Great Neck, N.Y., which may call for daily trades. Burke sees no drop in stocks in the next few months, Appel says buy and Hesler says, “Sell for the short term.” That should clear up any questions you have.
But even with newsletters in your pocket, success comes hard. You might fail to act on every scrap of their advice. Their approach might be too sophisticated or require too much trading. If you’re not investing tax-deferred retirement funds, you’ll owe a tax when you take a gain, which usually makes market timing uneconomic. And there’s always the risk that your guru is wrong. “The real test is not whether you sold and were glad,” says economist Paul A. Samuelson, “but whether you got back in at a lower or higher price than you sold for.”
There are ways investors can neutralize the fear of falling that don’t require taking a guess on when to sell. You might:
Spread your money over several different types of markets, in hope of always owning something that’s going up. Robert Farrell, Merrill Lynch’s senior investment adviser (and a cautious optimist), suggests buying an international mutual fund, a growth fund whose manager leans toward “producer industries like machinery and construction engineering,” and a small-company fund. Alan Shaw also makes a strong case for capital goods. Other themes common to several of the strategists are gold, oil stocks and communications.
Choose mutual funds that aren’t always fully invested. Managers who accumulate cash when stocks aren’t appealing offer some protection from market slides (that is, if their judgment is correct).
Pick a percentage of your money to keep in stocks and stick to it. A popular rule is 100 minus your age. At 30, commit 70 percent of your cash to equities; at 65, commit 35 percent. Once a year, compute the value of all of your financial assets (including your 401(k) plan) and buy or sell as necessary to restore the proper percentage of stock. To keep these shifts simple, make your core holdings no-load mutual funds.
There is one market forecast that the bulls and bears agree on: the gains of the ’90s will average much less than those of the ’80s–maybe just 4 to 6 percent a year. If so, that will disappoint the boomers who, as retirement heaves into view, have been swamping mutual funds with cash. Their experience with the market, however, should still incline them to buy and hold. Unlike investors of the 1930s, boomers “know” that when stock prices dip they snap right back. A vicious bear market might cure them of this touching faith. But short of that, they’ll be offering stocks some once-in-a-generation support.
