A 40-ish colleague approached me at my desk in the middle of the March market turbulence and announced that he was selling equities and buying bonds.
OK, I said. And when are you getting back in the market? Tomorrow? Next year? Later today? Never?
I didn't get an answer.
I told him if he stuck with bonds - or gold, or real estate, whatever he was thinking of - he would be working until he is 90.
My philosophy on trying to time the market is simple: Don't. I am what is known as a buy-and-hold investor. We stomach the downturns but ride the market's inexorable, long-term rise upward.
Not everybody agrees.
Rob Arnott is founder and chairman of Research Affiliates, a big institutional investor that practices what is known as "tactical asset allocation." That's Wall Street-speak for buying and selling stocks when you see something that others have missed.
His strategy involves market timing to some extent, although Arnott said "we don't think of ourselves as market timers because we don't try to pick the tops and bottoms. We try to pick the markets that are priced to give us the best long-term returns."
Arnott said with U.S. stocks priced at 32 times their earnings, and with value stocks from emerging markets priced at one-third of that, it might be smart to sell the U.S. market and invest in emerging market value stocks.
"If you believe that markets can become overpriced and underpriced, why not be tactical?" he said. "But be patient. If you are tactical, you are going to be wrong for extended periods."
Another reason to buy and hold is the competition. People much smarter than me are working day in and day out, eyes fixed their Bloomberg machines, poring over company reports, watching CNBC, crunching data and creating algorithms, all to beat the market.
Mortals like me cannot time the market. Others are in my camp.
"The best policy for portfolio management is one of benign neglect," said Christine Benz, director of personal finance at Morningstar. "Your portfolio is like a bar of soap - the more you handle it, the smaller it gets."
Somehow, I have been programmed to think like Benz. When stocks dropped more than 50 per cent back in 2009, I sucked it up and did nothing. Well, almost nothing. I started buying shares in the Vanguard Index 500 mutual fund as it careened downward.
My thinking was that it may go a lot lower, but it will eventually come back. Eventually. And being 53 or so at the time, I had at least another 10 years, maybe 20, to wait for the tide to come back.
"Most people don't behave like that," Arnott said. "If you are a patient, long-term investor, of course, you can tell when markets are getting frothy or when fear is utterly rampant. But most people trade the wrong direction and the wrong time, and they fund the success of those that have a discipline and stick with it."
Some thought the tide was going out two weeks ago. The Dow Jones industrial average dropped 1,400 points in the five days ending March 23 on fears of a trade war. The 5 to 7 per cent retreat was the biggest loss in more than two years.
Did you sell on Friday, March 23?
Over that weekend, Secretary of the Treasury Steven Mnuchin went on television to say they were trying to work things out on trade with China.
The Dow soared nearly 700 points Monday.
"We can't say people can't beat active money managers," said Don Bennyhoff, senior investment strategist at Vanguard Group.
"The odds are very difficult. If I was talking to my dad, I would tell him to think about all the mutual fund managers trying to pick stocks and trying to beat their benchmarks. Those same professionals have tools and resources and experience that most individuals don't. And they still have a difficult time outperforming the market."
The tricky part is knowing when to be in and when not to be in. Or when to buy a stock or when not to.
Who could have predicted the software giant Microsoft would climb 7.6 per cent Monday, the stock's largest, one-day percentage gain in nearly three years? A day later, Microsoft gave most of that gain back. I suppose you could have seen it coming if you read an analyst's report Monday calling for the share price to rise more than 50 per cent.
"Individuals who take time . . . can watch one or two stocks and get to know them very well and actually do better than a professional," said Steve Williamson, vice president of the National Association of Active Investment Managers.
"Do I think an individual can play the market? Of course," Williamson said. "Do I believe an individual should sit in a mutual fund or index fund for 20 years and then cash out? No. That is not a prudent way to invest."
"Attempting to move in and out of the market can be costly," a recent report from Fidelity Investments said.
"If you could avoid the bad days and invest during the good ones, it would be great-the problem is, it is impossible [italics mine] to consistently predict when those good and bad days will happen. And if you miss even a few of the best days, it can have a lingering effect on your portfolio."
But the case against timing can be pretty persuasive. Let's take the 20 years between December 31, 1997, and December 31, 2017.
If you put US$100,000 ($138,120) into the Standard & Poor's 500-stock index on the last day of 1997 and left it there, it would be worth more than US$400,000 today, according to data provided by Jeff DeMaso, director of research at Independent Adviser for Vanguard Investors, which is not part of the Vanguard Group of mutual funds. But if you somehow missed the 10 best days of those 20 years, your return would be cut in half, to US$200,000.
Picking those best days is hard. The best days and the worst days are usually clumped together, like the craziness of the past two weeks.
The eight days when the S&P 500 saw the biggest gains during the past 20 years occurred in a very small window between Sept. 30, 2008, and March 23, 2009. Seven of the 10 worst days came during an even shorter time frame: Septemeber 29 to December 1, 2008.
Think of that. You had to stomach nauseating downturns in the middle of the Great Recession and then pick yourself up and throw money at stocks right when mankind thought the end was near. "People talk about missing the best or worst days," Bennyhoff said. "They don't often talk about how close the best and worst days are."
Nevertheless, the returns are tempting. DeMaso said if you were smart enough to get out of the market just before the 10 worst bad days of the past 20 years, your US$100,000 would be worth US$850,000 instead of US$400,000. If you miss the 10 best and 10 worst, you are ahead more US$400,000 - or about the same as you are if you just buy and hold.
What do I do? I ride it out. My feeling is the market will go up two steps and then back one step. Then up two, back one. Over the long, long run, a buy-and-hold strategy will put me ahead.