If you have been following the stock market for the last few months, you may as well have been watching daytime soap operas – you’d have found just as many twists and turns in either. Let me give you a very brief recap of the events of the summer season.
As the world has turned, young and restless traders and investors across the globe have helped to map out a market that is riddled with uncertainty and intrigue. The condition of the U.S. economy has seemingly been changing with the days of our lives – one minute it is upbeat and enthusiastic – the next moment, it is downtrodden and lethargic. Although corporate earnings have largely come in above consensus estimates, companies have seemingly chosen to use their copious amounts of cash to gobble each other up in bold, contentious displays of bargaining, rather than to expand their operations and hire more workers. Thus, the employment situation remains weak and consumer demand and sentiment have languished along with it. The capricious nature of the market has almost been enough to force even the hardiest of investors to check themselves into a general hospital. Now, many market participants seek a guiding light that will point the way to calmer waters. But from what source will this guiding light emerge?
Investors hoping for this light to come from near-term economic developments will likely be disappointed, as the most recent data suggests that the recovery is petering out. Whether or not this information reflects merely a minor bump on the path to economic growth or a major roadblock is up for debate.
Thus, if the news will not be forthcoming with positive developments, where else may an individual investor turn?
To a different strategy? Many commentators have boldly proclaimed that the age-old strategy of “buy-and-hold” is dead – that it isn’t enough to find good companies in which to invest for the long haul; rather, one must endeavor to profit from the volatility in the markets. What these commentators frequently fail to point out is the fact that research has consistently shown that over the long term, individual investors who pursue a marketing-timing trading strategy do not outperform the market.
To different asset classes? The recent stock-market malaise coupled with the strong performance in the bond markets have convinced some that the value of equities as an investment option has been permanently tarnished. This argument is nothing new, as previous decades of stagnant stock markets yielded such observations as well. In the face of poor performance it is certainly tempting to jump ship. Those who felt that market paradigms had shifted in the mid 1970s fell into that temptation, and, as a consequence, likely missed out on a substantial amount of the bull market in stocks that began in the early 1980s. Remember, historical after-inflation returns for stocks remain – by leaps and bounds – the highest amongst any asset class.
Now, I will be the first to admit that solely basing present strategies upon past returns is a recipe for failure. However, it would be folly to ignore nearly a hundred years of well-established historical paradigms.
My thoughts? Don’t let the soap-opera-esque twists and turns of the market lure you away from time-tested strategies. They have persevered for very good reasons.