When it comes to market timing, the professionals have a word for it.
Slow and steady wins the race, they say. Buy 'em and hold 'em, and you'll retire rich and happy with hundreds of thousands in your 401(k).
Now, I can't say I entirely disagree. After all, if you had pulled your money out of the stock market after the crash of 1987 and jumped back in at the height of the dotcom boom in February 2000, you would have missed the biggest bull market in history and lost your shirt just a few months later. Invest a little money every month, keep it in for the long term and you, too, will see your investment portfolio appreciate by 8 percent to 10 percent a year.
Take a look at the last 10 years, though, and another picture begins to emerge. According to The Wall Street Journal, no decade in the nearly 200 years of recorded stock market history has turned in as dismal a performance as the years between 2000 and 2009. Since the end of 1999, stocks traded on the New York Stock Exchange lost an average of 0.5 percent a year, the Journal reported. In other words, you'd have been better off stuffing your cash under a mattress.
Clearly, market timing matters. But when is the right time to take the plunge? That's where experts disagree. For example, there's the well-known "January effect," in which the market's performance in the first month of the year is thought to set the pace for the following eleven. In years when the Dow has risen in January, the market's median performance for the rest of the year has been 10.4 percent, the Journal found. In years when the Dow has fallen in January, the median rise for the next 11 months was a slim .28 percent.
Does this mean that you should pull the covers over your head and stay in cash until 2011?
Not necessarily. According to Carneades, a financial analyst who blogs for Seeking Alpha, a stock market news and analysis site, January may not always be a reliable bellwether for full-year market performance. After pulling data on the S&P 500 for every year from 1952 to 2009 and throwing out the "extreme" years of 2001 and 2009, Carneades concludes that January is not the crystal ball that it's cracked up to be.
"That determination is better made--in my opinion--by recognizing that not all recoveries are created equally, via close monitoring of the mortgage market's response to the Federal Reserve's exit from its mortgage-backed security purchase program, and by examining the structural implications of sustained double-digit (real) unemployment," Carneades writes.
In other words, it's time to start watching the fundamentals and put that Magic 8 Ball away.