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VOL. 38 | NO. 17 | Friday, April 25, 2014

Ignore stock ‘reboot,’ keep long-term focus

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Frustrating. A word often used to describe computers, smartphones, tablets and, quite often, the stock market.

Sometimes we can press the exact same button on our computer as we did the day before and something completely different pops up on our screen. What do we do? Do we call the IT person or reboot?

That’s exactly what the stock market did in February. It just rebooted after a negative January to return over +4.5 percent for the month. In January, weakness in emerging markets and unrest in the Ukraine caused investor anxiety and a market decline of -3.5 percent.

Yet, it all seemed to “reboot,” or fix itself in February. The disparity in returns from January to February is a good example of how difficult it is to time the stock market.

The current information coming out of Washington is consistent (for a change) and there seems to be no reason to reboot the computer for now.

Janet Yellen, the new Federal Reserve Chairman, has told us monetary policy will be a continuation of what we’ve seen in the past. The Chairman made it clear that the Fed’s outlook is for further stimulus reductions in “measured steps,” adding that only a notable change in the outlook for the economy would prompt policy makers to slow the pace.

These same “measured steps” are always better for investors because it allows us to plan ahead for them rather than reacting to short-term or temporary swings in the market.

The market did extremely well in February with the S&P 500 Index closing at a new high of 1,859.45 on the last day of the month. Three rounds of Fed stimulus have helped push the S&P 500 Index up over 170 percent higher from a 12-year low of 676.53 on March 9, 2009.

No doubt, going to cash after 2008’s market collapse seemed like a good idea to most investors at the time, but too many of those same investors were overcome by fear and never reinvested in the stock market. Ultimately, they have missed much if not all of the run up in the market since 2009; another timing error.

Remember, one of the reasons timing the market is so tough is because we have to time it twice; once in deciding when to get OUT and then again in deciding when to get back IN. Most investment professionals don’t do this well, despite their claims, so what makes the average person, without any significant investment experience, think they can be successful market timers?

Investors who do try and time the stock market are constantly “rebooting their computer” because stocks move up and down without logic much of the time.

If the stock market were a computer, we would have to reboot every day and sometimes more than once. A quarter century of investing in the market has taught us the best and most profitable strategy for most investors is owning quality stocks with good earnings and staying the course over the long haul.

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