Comparison charts. They can be useful or detrimental, all depending on what you are using them for. Recently, the Wall Street Journal published a comparison chart highlighting the time period between June and September for 2008-2011. The chart's purpose is to take a look at the starting point of June and use the information from previous years to determine whether the market is trending downward or set to climb in 2011.
What does the chart tell us? Well, looking at 2008, we can see the market was down slightly at the beginning of summer, then seemed to level off for a period right before plummeting. In 2010 the market was a bit choppy in June and July, but then took off. About the same occurred in 2009. So, what is the moral of the story here?
Looking for Trends
After going through the hindsight information we have from 2008-2010, the Journal made a few interesting points. The ultimate conclusion was that "although a global collapse, as seen in 2008, is unlikely, stocks do not appear to be poised for a big rally either." So, no earth shattering predictions here.
The part of this year-by-year comparison I found most interesting was the fact that the article was using the chart as a way to potentially predict what may happen, due to previous trends, but also noted that the plunge of September 2008 was greatly intensified due to the implosion of Lehman Brothers.
When the 158 year old Lehman Brothers declared itself insolvent, there were no trend charts to predict it would occur, and although CEO Dick Fuld probably saw the writing on the wall for quite some time, average investors like you and me played golf while Fuld met with Bank of America and Barclays, desperate to save his firm from bankruptcy.
Bottom line? If an unpredictable event was a key issue in 2008's financial crisis, than looking at the chart to try to determine future trends is essentially futile. Why? Because, of course, another unforeseeable event could be currently looming on the horizon, or it may not be. That's the thing about unpredictable events...They're unpredictable. Such an event could either send the market into an strong recovery, or pull it into a downward spiral.
What's The Answer? More Information?
Maybe the answer is to break out more charts, because to really get an accurate picture, we'll need to look at the strengths and weaknesses of each current investment possibility. This will make our predictions much more accurate, right? No. This will turn us into crazy people with highly irrational behavior who can't sleep at night because we have to keep up with every news story, not to mention quarterly earnings reports, financial strength calculations, debt ratios, and numerous additional statistics and projections for all our investments. Of course, you realize this is impossible. Even with today's technology and the millions of reports that can be run, no one can predict the future.
The Real Answer to the Investment Strategy Question
Since unforeseen events will always be a huge factor, trying to time the market, even with the best and most up to date information, is unwise. It is, essentially, a form of gambling. The only way to invest prudently is by using the investment strategy that has been proven to outperform any rise or drop in the market, and it's pretty simple; short term volatility is always trumped by long term performance.
In order to perform well over time, smart investors will also do the following:
* Be aware of and cut fees and unnecessary costs.
* Determine your risk potential. The closer you are to retirement age, the less loss you can absorb. Be aware of that and work inside of your set risk parameters.
* Properly diversify your portfolio by spreading investments over a wide enough range to minimize risk as much as possible.
* Do not get in and out of the market based on fear or panic. Investing with the crowd will cause you to put your money in popular, trending investments. It will also set you up to pull out during times of panic when you see others doing the same.
* Return to the basics of buying low and selling high. This involves rebalancing according to a set plan; selling off gains and reinvesting in poor performers to keep your portfolio from becoming improperly weighted in areas that can leave you vulnerable.
What Will This September Bring?
That remains to be seen, but with all the possible scenarios, one thing is certain; trying to time the market or predict the future is not only impossible, but will keep you up at night.
When you understand how the market really works and learn that it will continue to perform over time, you will not have to stress over the news, past performance charts, or even sudden catastrophes or turns of events.
For more practical insights on investment strategies, be sure to take advantage of my resources including my 7 Deadly Investor Traps CD & Workbook. These resources will bring clarity to the most common investment mistakes, such as taking advice from a financial salesperson instead of a fiduciary, and how to discover if you are paying hidden fees and commissions along with your financial advisor's fees. This information can make the difference in thousands of dollars each year that can go directly into your nest egg instead of someone else's pocket.
Bryan's logical approach to investing and his determination to expose corrupt practices in the industry has led him to spearhead his own financial education company and gained him recognition with publications such as the Wall-Street Journal, US Senior News, Investment News, Financial Advisor Magazine, Forbes, Fortune, Kiplinger's, Investment Advisor Magazine. Bryan can also be heard on his weekly radio show, The Financial Coach, which is broadcast in St. Louis, MO, where he resides.
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