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February 19, 2010

If Money Managers Are So Smart, Why Do They So Often Get It Wrong?

If Money Managers Are So Smart, Why Do They So Often Get It Wrong?

Rosalind Resnick

Axxess Business Consulting, Entrepreneur

Summary

Last spring, my money manager told me that the economy had turned the corner and that now was the time to start moving money back into the s

Last spring, my money manager told me that the economy had turned the corner and that now was the time to start moving money back into the stock market. Having taken my lumps in 2008, I was still a little shell-shocked. But I followed his advice and put my retirement money back into the market, figuring that, even if the market went down, I wasn't going to need that money for another 30 years anyway. To my surprise, my retirement fund was way up by the end of the year and my money manager was my new hero.

Then, in December, when a big muni bond that I owned was about to mature, I started talking to my money manager about putting more money in the market. The economic indicators were positive, we both agreed, and while 2010 probably wouldn't see the same big run-up that we saw in 2009, the roller coaster volatility of 2008 was safely behind us. I could finally start diversifying away from super-safe cash and government bonds and begin to enjoy the kind of 8 to 10 percent returns that the stock market has historically delivered.

So, the second week in January, my money manager sent me a proposal recommending several funds that he thought I should invest in. I was all set to take the plunge. But then I hesitated. Was the recovery really as strong as the experts were saying? After all, the housing sector was still weak and unemployment was still in the double-digits. After walking all the way to the end of the diving board, I realized I couldn't jump in – not now, not yet.

Let's just say I'm glad I waited. January 2010 turned out to be the worst month for stocks since the market hit bottom last February. The Dow was down 3.5 percent, the S&P was off 3.7 percent and the Nasdaq composite dropped 5.4 percent. If I had followed my money manager's advice, I'd be down close to $150,000 today.

So what is my money manager saying now? He's telling me that, after January's pullback, there's even more reason to put money into stocks--because now the market is 5 percent cheaper. Only now he's advising me to phase in the money over time so that my portfolio doesn't get hammered by a piece of negative economic news or a new wave of bank-bashing coming out of Washington.

Now, don't get me wrong. My money manager is a good guy, not some rogue stockbroker who's looking to churn 'em and burn 'em. He's smart, he does his homework and he tries to look out for my interests, understanding that, like most investors who lived through the meltdown of 2008, I'm still a PTSD about the whole thing. But the reality is that, no one has a crystal ball that can predict the future--especially in these turbulent times. And in the short term, it's hard to time the market exactly right.