Clocks__2010-08-04_1339-304_0-300x168Carl Icahn was hit by an acorn and the markets fell.  In a sky-is-falling-moment, the activist investor said that he was cautious on equities and believed that stocks could see a big drop.

As soon as those words were uttered, investors pushed the sell button and stocks retreated from the psychologically important levels of Dow 16,000 and S&P 1,800.

The market is clearly nervous and looking for any reason to take profits. All that’s needed is a spark.

While Icahn has a ton of credibility, having scored on a number of impressive individual stock calls, he is not as well known for calling a market top or bottom. In fact, very few if any are known for making such calls. Exact timing of a turn of the market is rare. It simply does not happen often if at all.

While the urge to time the market is obvious for many reasons, avoid this urge, especially if you are an amateur investor.

There is a fine line between guessing and timing. When investors do attempt to time, they are often wrong.

Even Icahn backed off his comments about stocks explaining that he was not suggesting a crash of any sort was imminent. He knows that prognosticating on such things can only lead to trouble. You should think the same way.

There may be plenty of reasons why one should decide to sell a stock, but do not under any circumstance allow one of those reasons to be a belief that the market has reached some sort of top.

Here are three compelling  reasons you should not try to time the market:

It can’t be done

I can think of four specific moments in time when the market tanked. What I do not recall is having any advance warning from the so-called experts. Why would that be? Because it simply cannot be done. If there was some magical formula for predicting a market top and subsequent crash or bear market the inventor would be wealthy beyond all measure. It’s only natural to want to predict a market top, but in all of the history of the market, it just doesn’t happen. Best to not even try.

Lost opportunity

The reason it is not worth trying  to time the market is that in doing so,  you will likely miss out on huge gains. Alan Greenspan tried to predict a market top when he first uttered the words “irrational exuberance.” That speech was given Dec. 5, 1996, and at that date the Dow stood at 6,422 and the Nasdaq was at 1,300. When it was all over several years later in 2000, the Dow peaked at 11,723 and the Nasdaq reached 5,409.

So long, long after a top was called an investor could have nearly doubled their money in the uber-safe Dow Industrial index or quadruple their money in the more risky Nasdaq. Those who claimed the sky was falling were off by about four years and in that time there was lots of money to be made. Just because valuations, according to certain measures, are rich or frothy or irrationally exuberant does not mean a correction or fall will come any time soon.

Consider the alternatives

So is this is a suggestion that we should just blindly trust the market and let the chips fall where they may? No, that is not what I am saying. What I am saying is that those that say the market has peaked are most likely to be wrong.

At the same time what are your alternatives? Will you just sit on cash earning a negative rate of return – counting inflation and currency devaluation? Or maybe you can put your money in one of those high-yielding bonds? Oops, I forgot that bond yields will be rising in the very near future, eating away at the value of that investment class.

No, stocks are still the best place to be. The reality is that there are plenty of reasons to continue to be bullish. At the top of that list is an upward sloping yield curve, highly accommodative Federal Reserve, and the simply long time that it will take to recover from the financial crisis of 2008. There are few investment options that offer the long-term returns of the equity market – even at these levels.

 

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