You Can’t Time The Market With Your Retirement Accounts

I had a very interesting conversation with a buddy last week about my thoughts on him pulling his retirement money (401K, and IRA) out of stock mutual funds and instead investing his money in “money market” or “bond funds” (still within his retirement accounts).

I told him I didn’t think it was a very good idea. The following is my opinion on whyI believe trying to “time” the stock market with your retirement accounts (by getting out and getting back in the stock market) is not a good idea.

The Stock Market is “Mostly” Efficient:

I am a firm believer in market efficiency. In other words, I believe that all available positive and negative information (news, press releases, gossip, etc.) is nearly instantaneously reflected in the prices which make up the stock market. I also extend this belief to include any information that can be gleaned from pouring over charts of various companies and industries The only possible exception to my belief in market efficiency is “insider information” that has not been publicly released (although I believe most of this information is reflected in current stock market prices too).

For example, there is a myth that oil is more expensive in the winter than it is in the summer because demand is higher with the use of home heating oil in the Northeast. If this were true then people would buy oil contracts in the summer time allowing them to sell the oil in the winter causing the opportunity to make a quick buck with oil to almost instantaneously equalize.

With this personal belief in mind, I’ll now go back to my buddy’s question about pulling his 401k savings out of stocks and put them into cash or bond funds.

You remember that a couple of weeks ago, the stock market dropped significantly the Monday following Standard and Poor’s downgrade of United State’s Debt Rating. My buddy was convinced that the stock market was going to collapse and the Dow was going to free fall to under 9,000 points and he was leaning towards pulling his money out that day.

I advised him not to because mutual funds trades (unlike individual stocks and Electronically Traded Funds ETF) did not process until the close of the trading day (4pm Eastern Time). A tried to explain to him that by the close of the day (6 hours from when he wanted to sell) all of the negative information surrounding the debt downgrade, European Debt Crisis, etc, would already be reflected in the stock market prices when his stock mutual funds were unloaded. In other words, the stock market would be “neutral” again and whatever happened the next day was anyone’s guess. There may be more bad news coming out the next day, or they may be some good news that comes out. YOU JUST NEVER KNOW!

As it was, my buddy decided to follow through with cashing out the stock mutual funds in his retirement accounts (closed at the end of the business day on Monday), only to have the stock market roar back nearly 5% the next day.

Yes, there will always be stories of our buddies who were successfully able to predict the economic collapse of 2008, or the Internet Bubble of 2000, but the reality is (I personally believe) that these individuals were just lucky. But they’ll never tell you about the times they stalled in getting back into the market before it had already gone up a significant amount.  You can’t consistently time the market as an average investor and get superior returns, even professional investors fail to consistently beat the market.

In case you don’t believe me, look at the performance of actively managed mutual funds. When compared to the benchmark averages (sometimes referred to “Lipper Averages“), more than 60% of actively managed stock mutual funds fail to outperform their segment indexes (in other words, if a mutual fund targets the oil and gas industry, you’ll do better just buying an index fund targeting the entire oil and gas industry rather than buying an actively managed mutual fund that targeted only the “best” companies within the oil and gas industry).

That’s my opinion on trying to time the stock market, as always, I welcome your comments below! Thanks!

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