Another take on the market rally -- one that has real support
How do investors know who's right? It's actually quite simple. No one knows.
Wall Street insiders don't know. Economists don't know. Financial pundits don't know. Market-timing newsletters don't know. Brokers and advisors certainly don't know!
If brokers and advisers knew, they would have advised you to go to cash in early 2008 and return to the markets aggressively in 2009. Did you get this advice from your broker or adviser?
Stock prices are random. They don't have a pattern subject to predictive analysis.
News moves markets. Not yesterday's news, but tomorrow's news. Yesterday's news is already factored into market prices. No one can predict tomorrow's news, or how the market will react to it.
There is no correlation between the returns of the market in any one year (or any one day!) and subsequent returns.
Why then do investors focus so much time and energy on predictions which are nothing more than unscientific musings?
Because they believe the only way to invest intelligently is to decipher a market pattern that does not exist.
Here's a better option -- one that actually has reams of academic support.
Ignore those who say they can predict the direction of the markets. Determine your asset allocation. Invest in a globally diversified portfolio of low cost index funds.
It's not as challenging, but it is far more likely to improve your returns.
Dan Solin is the author of The Smartest Investment Book You'll Ever Read and The Smartest 401(k) Book You'll Ever Read. His new book, The Smartest Retirement Book You'll Ever Read, will be published September 1, 2009. Visit his website at Smartestinvestmentbook.com.