Gridley Associates Inc


Good Timing Depends Upon Your Timeframe

We keep reading about record levels of cash being held by investors as they await the opportunity to invest their cash in the next big selloff in stocks. Unfortunately for those investors we have just seen the best returns in the month of September in more than 60 years so finding that perfect entry point just got harder. Have we already seen the bottom? Will there be more opportunities in October? The answer is we don’t know but if your attempt at market timing hinges on the desire to "win" in a short timeframe you’re likely destined to be disappointed. My crystal ball is no better than anyone else’s and I can’t predict the short term direction of the markets but I think the one thing we can predict is that market volatility won’t be going away anytime. That’s good and bad because volatility can produce good buying opportunities but it can also create a great deal of anxiety about investments already made. If you insist to try to time the market, here is what I think is a better way.

Consider what the market will be like 3-5 years from now, not 3-5 days or even 3-5 weeks. Most investors will probably agree that we’re still in a gradual economic recovery and that a few years from now things should look brighter. In other words the stock market will very likely be higher 3-5 years from now. In that context your short term entry point really doesn’t’ matter that much; the more important thing is to make sure you don’t wait too long to get invested. If you didn’t catch the market lows in 2008 or 2009 it’s unlikely you’ll catch it in 2010 either. Investing when the market hits its absolute low is more about being lucky than being smart. Market bottoms tend to come when the outlook is especially bleak and making additional investments feels like throwing money away. Very few investors have the real discipline and stomach for the risk taking that it takes to buy at or near the bottom, assuming they can spot it in the first place.

If you have a target entry point in mind you’ll likely never hit it or even more likely move it further away as you get close. This is just simple human nature, an unfortunate mix of fear and greed. What helps drive this is the concern that at investment you make today will be underwater a day, week or even month later. Avoid setting arbitrary targets that feed that fear and look longer term. If the market has the potential to be 20% higher a few years from now do you really care if you’re up only 18% because you missed the bottom? One thing you will care about is if your search for the perfect entry point kept you from being invested at all and you missed the whole return.

My point here is if you have cash to invest don’t worry about the short term, focus on the longer term. If you believe the economy and the stock market will be in a better place a few years down the road, get invested and don’t worry about finding the absolute best time to get in. As your time frame extends your exact entry point becomes less and less relevant. 

Randy Gridley

October, 2010