Tuesday, May 12, 2009

No Trees Grow To The Sky

It's been a great run.  The S&P 500 is up about 35% from the March low.  One of the best rallies in my career.  

So now what?  Up another 35% in the next nine weeks?  That would be nice.  But unlikely.

There's an old saying that no trees grow to the sky.  Nothing goes straight up forever.  So we'll probably have a pullback.  Could be soon.  Perhaps beginning today.  What will you do?

It would be nice if we could sell here and buy after the correction.  But we can't.  It just doesn't work that way.  You might be fortunate enough to sell near a top, and buy back near a bottom.  Since we never know where the tops and bottoms are until afterwards, it requires a fair bit of luck.  Here's a more common scenario:  Sell at the first sign of a pullback.  At first you're right, but you need two good calls, and you miss the second one (getting back in).  As the market climbs back (and it will) you wait for one more pullback.  But it never really comes, and you end up reinvesting above your initial sell level. 

Or this one:  you sell because you expect a pullback.  It doesn't happen.  The market continues to rise.  You kick yourself because you're a long-term investor and you never intended to try to time the market.  At first you pray for a correction so you can get back in, but eventually you capitulate and buy back at a higher level.  Only then does the correction come.

You don't believe it could happen?  I've seen both scenarios many times.  They've happened to me too.  It's just too hard to time the market.  

My suggestions:

1) Expect volatility.  Easy to say, but hard to do.  It's human nature to be excited when you see the value of your portfolio rise, and to be unhappy when it falls.  If you truly are a long-term investor, you should understand that even a secular bull market will have temporary pullbacks.  The best time to remind yourself of this is after a strong upturn.

2) Keep some cash for the inevitable corrections.  Never go "all in."  You should always have a certain portion of your portfolio in cash.  When the market corrects, you'll have the opportunity to buy more at low levels.  

Eventually the market will move down.  When that happens, the bears will raise their I-told-you-so flags and predict that "you ain't seen nothin' yet."  They'll offer S&P 500 targets of 600, or 500, or 400.  Could we get there?  I suppose so.  Who knows?  But they've been wrong for the last 35% move, and they'll be wrong long-term. 

Don't become too elated over short-term rallies, and don't get too depressed when the inevitable correction comes.

No comments:

Post a Comment