Vanguard article on being too cautious.

This little article reminds me of a section in a book I read that I haven't been able to find. Basically, a lot of the big runup in stocks happened over a very short period of time. If you were out of the market during the jumps, you missed a lot of the appreciation.

I think many people risk the same sort of over-caution this time (but, of course, everyone has to act based on their comfort level and not pronouncements by strangers).

[link|http://flagship4.vanguard.com/VGApp/hnw/VanguardViewsNCArticle?chunk=/freshness/News_and_Views/all_sidelines_0730_ulm5_1028041178_ecmSYS.html|Here].

Here are three important reasons that shifting to the sidelines is a risky strategy:

The crystal ball is cloudy: It's unlikely that you'll know when it's "safe" to buy stocks. What will the signal be? A week or two of rising prices? We've seen such stretches several times since the bear market in stocks began in March 2000. How is an investor supposed to know when a rebound is temporary or the start of a new bull market? In bull markets, stock market averages drop nearly half of the time\ufffdstock prices fell on 46% of 4,452 trading days from August 13, 1982, to March 23, 2002, when the Dow Jones Industrial Average moved from 777 to 11,723. And stock prices have risen on 45% of the 582 trading days since the current bear market began on March 24, 2000.

Missing the party: You could pay a very high "opportunity cost" for being out of the stock market for even a short period when a recovery begins. Stock prices rarely move up or down in a steady fashion, especially early on in an up or down market cycle. From June 30, 1987, through June 30, 2002, the Standard & Poor's 500 Index posted an average annual return of 10.87%. But investors who missed only the 10 best days during that 15-year period would have earned far less\ufffdan average annual return of 7.22%. Many of those 10 best days followed periods of poor performance when a market-timing investor might have been tempted to be "on the sidelines." For example, the S&P 500 jumped 5.73% on July 24, 2002, and 5.41% on July 29, 2002, after weeks of steeply falling stock prices. We don't believe any mortal has the 20-20 foresight needed to time such sudden shifts.

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Cheers,
Scott.

Post #47,780 by Another Scott 8/1/02 6:17:02 PM Reply	Vanguard article on being too cautious. This little article reminds me of a section in a book I read that I haven't been able to find. Basically, a lot of the big runup in stocks happened over a very short period of time. If you were out of the market during the jumps, you missed a lot of the appreciation. I think many people risk the same sort of over-caution this time (but, of course, everyone has to act based on their comfort level and not pronouncements by strangers). [link\|http://flagship4.vanguard.com/VGApp/hnw/VanguardViewsNCArticle?chunk=/freshness/News_and_Views/all_sidelines_0730_ulm5_1028041178_ecmSYS.html\|Here]. Here are three important reasons that shifting to the sidelines is a risky strategy: The crystal ball is cloudy: It's unlikely that you'll know when it's "safe" to buy stocks. What will the signal be? A week or two of rising prices? We've seen such stretches several times since the bear market in stocks began in March 2000. How is an investor supposed to know when a rebound is temporary or the start of a new bull market? In bull markets, stock market averages drop nearly half of the time\ufffdstock prices fell on 46% of 4,452 trading days from August 13, 1982, to March 23, 2002, when the Dow Jones Industrial Average moved from 777 to 11,723. And stock prices have risen on 45% of the 582 trading days since the current bear market began on March 24, 2000. Missing the party: You could pay a very high "opportunity cost" for being out of the stock market for even a short period when a recovery begins. Stock prices rarely move up or down in a steady fashion, especially early on in an up or down market cycle. From June 30, 1987, through June 30, 2002, the Standard & Poor's 500 Index posted an average annual return of 10.87%. But investors who missed only the 10 best days during that 15-year period would have earned far less\ufffdan average annual return of 7.22%. Many of those 10 best days followed periods of poor performance when a market-timing investor might have been tempted to be "on the sidelines." For example, the S&P 500 jumped 5.73% on July 24, 2002, and 5.41% on July 29, 2002, after weeks of steeply falling stock prices. We don't believe any mortal has the 20-20 foresight needed to time such sudden shifts. [...] Cheers, Scott.
Post #47,785 by ben_tilly 8/1/02 8:23:22 PM Reply	The fundamental stupidity of that argument Missing all of the key days is exactly as difficult as managing to jump in for them. Same exact coin, opposite sides. Unless you are gambling, you have to buy stocks for long-term reasons. And if you disagree with the market about something long-term, then it is valid to act on your own beliefs. (My belief, of course, being that I don't think the market will long-term sustain a permanently rosy belief about long-term growth in the economy. Therefore P/Es will come back down, and that means that the stock market needs some more devaluing.) Cheers, Ben "Perl is like vice grips. You can do anything with it, and it's the wrong tool for every job." --Unknown
Post #47,874 by deSitter 8/2/02 3:59:36 PM Reply	Re: The fundamental stupidity of that argument Correct. This was clear back in the early 90s as computer trading generated enormous volumes of trades while interest in traditional investment venues and banking-based services declined. It was nothing but speculation. I even thought it might be the beginning of the end of banking as we knew it, and may yet be. -drl

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