Comments on: How to Make Money in the Stock Market (Revisited) http://www.fivecentnickel.com/2007/08/24/how-to-make-money-in-the-stock-market-revisited/ personal finance tips, tricks, and commentary Sun, 22 Nov 2009 03:39:46 -0500 http://wordpress.org/?v=abc hourly 1 By: dong http://www.fivecentnickel.com/2007/08/24/how-to-make-money-in-the-stock-market-revisited/comment-page-1/#comment-79088 dong Tue, 28 Aug 2007 23:47:16 +0000 http://www.fivecentnickel.com/2007/08/24/how-to-make-money-in-the-stock-market-revisited/#comment-79088 nickel: I'm fan of rebalancing, and as you astutely acknowledge it's inherently a form of market timing just without the active decision on when to do it. However for a calm and disciplined investor picking a random but systematic point in time for rebalancing is really no different than picking specific point in time. If you can't market time then you're no worse off, and if you can then you're better off. Of course, most investors do not behave calmly and rationally. The market may be efficient but far from sensible. nickel: I’m fan of rebalancing, and as you astutely acknowledge it’s inherently a form of market timing just without the active decision on when to do it. However for a calm and disciplined investor picking a random but systematic point in time for rebalancing is really no different than picking specific point in time. If you can’t market time then you’re no worse off, and if you can then you’re better off. Of course, most investors do not behave calmly and rationally. The market may be efficient but far from sensible.

]]> By: nickel http://www.fivecentnickel.com/2007/08/24/how-to-make-money-in-the-stock-market-revisited/comment-page-1/#comment-79086 nickel Tue, 28 Aug 2007 17:11:18 +0000 http://www.fivecentnickel.com/2007/08/24/how-to-make-money-in-the-stock-market-revisited/#comment-79086 dong: I think adjusting your asset allocation should be done (as necessary) on an ongoing basis rather than based on market performance. If you're closing in on retirement, you should be moving toward a more conservative mix. That's true regardless of how the market is performing. On the other hand, regular rebalancing (say twice a year) gives you a systematic method for selling high and buying low. If a certain investment category or fund runs wild, it will be overrepresented relative to your target allocation. Thus, when you rebalance, you'll be selling off a bit of something that has performed exceptionally well and buying into something that has performed less well. dong: I think adjusting your asset allocation should be done (as necessary) on an ongoing basis rather than based on market performance. If you’re closing in on retirement, you should be moving toward a more conservative mix. That’s true regardless of how the market is performing.

On the other hand, regular rebalancing (say twice a year) gives you a systematic method for selling high and buying low. If a certain investment category or fund runs wild, it will be overrepresented relative to your target allocation. Thus, when you rebalance, you’ll be selling off a bit of something that has performed exceptionally well and buying into something that has performed less well.

]]> By: dong http://www.fivecentnickel.com/2007/08/24/how-to-make-money-in-the-stock-market-revisited/comment-page-1/#comment-79085 dong Tue, 28 Aug 2007 17:02:50 +0000 http://www.fivecentnickel.com/2007/08/24/how-to-make-money-in-the-stock-market-revisited/#comment-79085 I'm generally a fan of passive investing, but sometimes I think that it gets taken a little too far. I don't mean to imply that you have, but rather there is some worth in attempting to time the market or pick individual stocks for that matter. On timing, I think more important to anything else is the timing as it applies to your life plans. If you're in the market and only time withdrawals by need you might be caught off guard. I think it's best to have a plan. I mean if you know you're going to retire in a few years, might it not make some sense to adjust your positions when you think you're at a top? I’m generally a fan of passive investing, but sometimes I think that it gets taken a little too far. I don’t mean to imply that you have, but rather there is some worth in attempting to time the market or pick individual stocks for that matter.

On timing, I think more important to anything else is the timing as it applies to your life plans. If you’re in the market and only time withdrawals by need you might be caught off guard. I think it’s best to have a plan. I mean if you know you’re going to retire in a few years, might it not make some sense to adjust your positions when you think you’re at a top?

]]> By: Aaron http://www.fivecentnickel.com/2007/08/24/how-to-make-money-in-the-stock-market-revisited/comment-page-1/#comment-79059 Aaron Sat, 25 Aug 2007 21:15:08 +0000 http://www.fivecentnickel.com/2007/08/24/how-to-make-money-in-the-stock-market-revisited/#comment-79059 This is certainly oversimplified, but I think it still makes the point. The point is, trying to time the market has a lot of people money and finding the exact bottom is impossible. Selling out on a downturn can make your returns go south in no time. Patience and risk tolerance are key. This is certainly oversimplified, but I think it still makes the point. The point is, trying to time the market has a lot of people money and finding the exact bottom is impossible. Selling out on a downturn can make your returns go south in no time. Patience and risk tolerance are key.

]]> By: nickel http://www.fivecentnickel.com/2007/08/24/how-to-make-money-in-the-stock-market-revisited/comment-page-1/#comment-79058 nickel Sat, 25 Aug 2007 15:57:52 +0000 http://www.fivecentnickel.com/2007/08/24/how-to-make-money-in-the-stock-market-revisited/#comment-79058 Yes, of course this is an oversimplification. However, the point that good days are frequently directly after bad days is incredibly important. If you sell out on the way down, you will very frequently lock in your loss and miss the big bounce. You are assuming that you will sell *before* the drop, and then miss both the low and high performing days. But that's <b>not</b> how investors behave. People get rattled when they incur losses, they sell, and then while licking their wounds, they miss the best part of the recovery. Once that happens, they feel better about the market and jump back in. Thus, they ended up selling low(er) and buying high(er). Moreover, in a generally growing market (which ours has been over almost any reasonably long period) the ups outweigh the downs, so sitting out will (on average) lead to underperformance. Yes, of course this is an oversimplification. However, the point that good days are frequently directly after bad days is incredibly important. If you sell out on the way down, you will very frequently lock in your loss and miss the big bounce. You are assuming that you will sell *before* the drop, and then miss both the low and high performing days. But that’s not how investors behave. People get rattled when they incur losses, they sell, and then while licking their wounds, they miss the best part of the recovery. Once that happens, they feel better about the market and jump back in. Thus, they ended up selling low(er) and buying high(er).

Moreover, in a generally growing market (which ours has been over almost any reasonably long period) the ups outweigh the downs, so sitting out will (on average) lead to underperformance.

]]> By: Shadox http://www.fivecentnickel.com/2007/08/24/how-to-make-money-in-the-stock-market-revisited/comment-page-1/#comment-79057 Shadox Sat, 25 Aug 2007 15:52:11 +0000 http://www.fivecentnickel.com/2007/08/24/how-to-make-money-in-the-stock-market-revisited/#comment-79057 This type of analysis is flawed because, as one of the other commenters pointed out, it assumes that by staying out of the market one misses out only on the good days while still hitting ALL of the bad days. Of course, if you are out of the market you will miss those down days as well, so your average return would be substantially higher than the numbers you calculated. In fact, I am guessing that bad days and good days show up at about the same frequency. Moreover, I imagine that good and bad days are probably clustered together - i.e. really good days closely preceding or following really bad days, as volatility in the market increases in times of uncertainty. If that is the case, and you take out the good and bad days in equal measure, I am guessing that your average return would still be close to the 10.7% average over the entire period. This type of analysis is flawed because, as one of the other commenters pointed out, it assumes that by staying out of the market one misses out only on the good days while still hitting ALL of the bad days. Of course, if you are out of the market you will miss those down days as well, so your average return would be substantially higher than the numbers you calculated.

In fact, I am guessing that bad days and good days show up at about the same frequency. Moreover, I imagine that good and bad days are probably clustered together – i.e. really good days closely preceding or following really bad days, as volatility in the market increases in times of uncertainty. If that is the case, and you take out the good and bad days in equal measure, I am guessing that your average return would still be close to the 10.7% average over the entire period.

]]> By: MoneyNing http://www.fivecentnickel.com/2007/08/24/how-to-make-money-in-the-stock-market-revisited/comment-page-1/#comment-79051 MoneyNing Fri, 24 Aug 2007 18:24:23 +0000 http://www.fivecentnickel.com/2007/08/24/how-to-make-money-in-the-stock-market-revisited/#comment-79051 Great analysis! This is quite a strong argument for not panicking :) Great analysis! This is quite a strong argument for not panicking :)

]]> By: nickel http://www.fivecentnickel.com/2007/08/24/how-to-make-money-in-the-stock-market-revisited/comment-page-1/#comment-79045 nickel Fri, 24 Aug 2007 13:06:02 +0000 http://www.fivecentnickel.com/2007/08/24/how-to-make-money-in-the-stock-market-revisited/#comment-79045 @raz: One problem with that approach is that mutual funds are priced at the close of the day. Thus, if you wait until the day after, you get the closing price after the potential immediate rebound. This is less of an issue for individual stocks or ETFs. @Matt: Bear markets are defined as a 20% decrease in stocks. This period most definitely includes a serious bear market. In fact, that's why I re-worked the numbers... To include the full effects of 2000-2002 bear market. @raz: One problem with that approach is that mutual funds are priced at the close of the day. Thus, if you wait until the day after, you get the closing price after the potential immediate rebound. This is less of an issue for individual stocks or ETFs.

@Matt: Bear markets are defined as a 20% decrease in stocks. This period most definitely includes a serious bear market. In fact, that’s why I re-worked the numbers… To include the full effects of 2000-2002 bear market.

]]> By: MITBeta http://www.fivecentnickel.com/2007/08/24/how-to-make-money-in-the-stock-market-revisited/comment-page-1/#comment-79044 MITBeta Fri, 24 Aug 2007 12:55:00 +0000 http://www.fivecentnickel.com/2007/08/24/how-to-make-money-in-the-stock-market-revisited/#comment-79044 @raz: How long do you leave it in for? The top 10 best days only amount to 1/5 of the gain over that period. The top 30 account for 2/3. Why not just leave your money in and get ALL of the returns? @raz:

How long do you leave it in for? The top 10 best days only amount to 1/5 of the gain over that period. The top 30 account for 2/3. Why not just leave your money in and get ALL of the returns?

]]> By: Matt http://www.fivecentnickel.com/2007/08/24/how-to-make-money-in-the-stock-market-revisited/comment-page-1/#comment-79043 Matt Fri, 24 Aug 2007 12:47:20 +0000 http://www.fivecentnickel.com/2007/08/24/how-to-make-money-in-the-stock-market-revisited/#comment-79043 You're analyzing what is probably the best time period in our stock market's history. We haven't had a true bear market during that period, because Easy Al has always been there to bail out the speculators. You’re analyzing what is probably the best time period in our stock market’s history. We haven’t had a true bear market during that period, because Easy Al has always been there to bail out the speculators.

]]> By: razmaspaz http://www.fivecentnickel.com/2007/08/24/how-to-make-money-in-the-stock-market-revisited/comment-page-1/#comment-79042 razmaspaz Fri, 24 Aug 2007 12:21:31 +0000 http://www.fivecentnickel.com/2007/08/24/how-to-make-money-in-the-stock-market-revisited/#comment-79042 Well put this time. This is a much more complete argument. Of course it does make an argument for keeping your money on the sidelines until there is a bad day, and then jumping in the day after. If the best days come right after the worst, you could avoid the worst, and be fairly certain of being in on the best. Even if a bad day was followed by another bad day, history shows that the market goes up with time. This seems like a hard thing ot do, but it is really nothing more than following the philosophy of buy on bad news, sell on good news. Well put this time. This is a much more complete argument. Of course it does make an argument for keeping your money on the sidelines until there is a bad day, and then jumping in the day after. If the best days come right after the worst, you could avoid the worst, and be fairly certain of being in on the best. Even if a bad day was followed by another bad day, history shows that the market goes up with time. This seems like a hard thing ot do, but it is really nothing more than following the philosophy of buy on bad news, sell on good news.

]]> By: Cindy http://www.fivecentnickel.com/2007/08/24/how-to-make-money-in-the-stock-market-revisited/comment-page-1/#comment-79039 Cindy Fri, 24 Aug 2007 11:52:38 +0000 http://www.fivecentnickel.com/2007/08/24/how-to-make-money-in-the-stock-market-revisited/#comment-79039 Wow! Excellent analysis. It is so amazing that in 25 years, even missing out on 10 days has a significant impact. Another variation: Could you include DCA, to if that would smooth the variations out? Wow! Excellent analysis. It is so amazing that in 25 years, even missing out on 10 days has a significant impact.

Another variation: Could you include DCA, to if that would smooth the variations out?

]]> By: nickel http://www.fivecentnickel.com/2007/08/24/how-to-make-money-in-the-stock-market-revisited/comment-page-1/#comment-79038 nickel Fri, 24 Aug 2007 11:52:22 +0000 http://www.fivecentnickel.com/2007/08/24/how-to-make-money-in-the-stock-market-revisited/#comment-79038 The unfortunate thing is that the worst days often seemingly come out of nowhere, making them virtually impossible to avoid for the typical investor. On top of that, the best days are frequently concentrated into the very early stages of a recovery, before most shaken investors get their nerve back. The thing that causes people to get out of the market is a scary drop, and they don't get back in until things are looking bright. This means they'll lock in a loss, and then often miss out on the strong positive days in the very early stages of the recovery. Thus, while it might be interesting to look at, I'm not sure it would be all that informative in the present context. The unfortunate thing is that the worst days often seemingly come out of nowhere, making them virtually impossible to avoid for the typical investor. On top of that, the best days are frequently concentrated into the very early stages of a recovery, before most shaken investors get their nerve back. The thing that causes people to get out of the market is a scary drop, and they don’t get back in until things are looking bright. This means they’ll lock in a loss, and then often miss out on the strong positive days in the very early stages of the recovery. Thus, while it might be interesting to look at, I’m not sure it would be all that informative in the present context.

]]> By: plonkee http://www.fivecentnickel.com/2007/08/24/how-to-make-money-in-the-stock-market-revisited/comment-page-1/#comment-79037 plonkee Fri, 24 Aug 2007 11:37:06 +0000 http://www.fivecentnickel.com/2007/08/24/how-to-make-money-in-the-stock-market-revisited/#comment-79037 I think its been mentioned before, but I wonder what effect would missing the 10 etc worst days have had. I think its been mentioned before, but I wonder what effect would missing the 10 etc worst days have had.

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