When Should You Buy Stocks? Even the Experts Disagree.

Markets are volatile and uncertain. “Experts” argue back and forth on their own interpretation of financial reports, earnings estimates, and economic indicators until they have covered all possible pathways forward for the market. This way, whatever direction the market goes, someone will claim credit and be pronounced an investment guru. Unfortunately, it is impossible to know which “expert” will be correct. The result is that most investors absorb information from many sources and try to make a rational investment decision. This behavior does not exclude investment professionals, who may just have more time and resources available to make decisions. What follows is that, in attempts to beat the market, almost all people try to time the market and become traders rather than investors.

It is extremely difficult to take a long term view on an equity investment for the majority of people. This is partially the reason why there are so many financial advisors and solutions available to anyone with a bank account. They are providing a service by taking the responsibility of your financial future into their hands. Instead of trying to beat the market, these service providers are building portfolios that grow with the market. Portfolio building requires thorough fundamental research including deep dives into Financial Statements, SEC Filings, Financial Ratios, Corporate Structures, etc. It also requires an advanced understanding of the global economy. Most individuals do not have the time, patience, or resources at their disposal to properly construct a diversified portfolio.

According to a 2014 study by DALBAR, the 20 year average retail investor return of 5.02% compares poorly to the S&P 500 20 year return of 9.22%. The study suggests the cause of the discrepancy to be mostly attributed to investors attempting to time the market. Investors tend to sell when the market is trending down, while buying during a bull market. There are obviously several interpretations as to why this occurs. I am using that statistic to advocate for proper portfolio diversification, asset allocation, and avoidance of timing the market. With those principles, you have a few choices. You can pay someone else to make all the investment decisions and remain ignorant of the entire process. You can take complete ownership by opening up your own brokerage account, calculating your own asset allocation, doing full due diligence on all portfolio companies and then executing the trades. The other alternative is a combination of the prior two, where you engage a professional but remain involved in the process and alert to any investment decisions. I feel it is important to note that there also several levels of professional in the investment community, but that is a discussion for another time. Unless you want to remain ignorant, understanding the investment decision making process is something you can and should do.

Bringing this discussion back to trying to time the market, a major component of the investment decision making process is using fundamental data to project future values on the company that may be several years down the line. By fundamental data, I mean Income Statement, Balance Sheet, Cash Flow and other values found in the 10-Q and 10-K SEC Filings of publicly traded companies. For instance, the value of a company’s Balance Sheet assets in 10 years is projected using a growth rate that has several well research assumptions built in. I am not arguing that these projections are always correct nor am I saying that the long term value of a company is always greater than the correct value. What I am saying is that by trying to time the market, you are attempting to outsmart these assumptions and historically, this does not work. Wealth advisors take the timing component off the table. They create a portfolio with a long term horizon and do not attempt to trade in order to make excess profit. Rebalancing is not trading as it is used to maintain an optimal long term asset allocation that has already been established. Still, this does not guarantee success but attempting to predict the short term future of the market is more often a losing strategy.