Market timing: an impossible strategy

So, last week the markets dropped like a rock. The following losses were recorded for the Dow Jones Industrial Average:

Monday: Down 369 points
Tuesday: Down 508 points
Wednesday: Down 189 points
Thursday: Down 678 points
Friday: Down 128 points

For those of you keeping score, that's a total point drop of 1,874 or 18% in a single week. Pretty gut-wrenching wouldn't you say? If you are like a lot of people, you didn't get much sleep last week.

But what happened yesterday? Up 936 points. Almost 1,000 points in a single day! The percentage increase of 11.6 percent was the biggest since 1937 and it was the biggest one day point gain ever. The next closest was a 499 point gain in the year 2000.

What does this tell us about the markets? Have we reached a bottom? The honest answer is "who knows." No one has a crystal ball. And in fact, we will probably see our fair share of "down" days in the weeks to come even if we are firmly on our way to a recovery.

What it does tell us is that market timing is not a strategy. No one can call the slides or the rebounds with any degree of accuracy. The only reasonable strategy is to build a portfolio that meets your individual needs and stick with it. There will be good days and there will certainly be bad days, but on a long term basis you will be rewarded for hanging in there. Give yourself a pat on the back if you were worried last week but you stayed with your carefully designed portfolio. I'm sure it wasn't easy.

All you can do is try to remove as much emotion as possible from your decision making process. As many professionals were advising last week: "panic is not an investment strategy." Try not to make any significant financial decisions in the heat of the moment.

For example, if the events of the past few weeks have left you consumed with anxiety, maybe you should consider some changes to your portfolio, but you should make those changes gradually and with a cool head. If you really want to increase your cash or fixed income allocation, do so over a time period of several weeks or months to eliminate emotional decisions that you might regret later.

And, if you already have a well thought out plan, stick with it. Rebalance as needed, but stick with your plan. Don't run from stocks because they can be volatile. Volatility in the short term is the "price" you pay for the higher long term returns of stock. As Nick Murray, one of my favorite investment authors once said "the greatest long term risk of stocks is not owning them."