Bonds strengthen, stock “rally” not proven
We pick the mix of investments that maximizes the expected returns while not exceeding a fixed maximum risk. In the past month, we have, once again, made a little bit of money in low-risk investments.
We have stayed out of stocks, and are continuing to stay out of them. This is despite the much publicized upward movement in stock prices. This move in stocks has been so hyped by the media, that I have even been receiving emails from some concerned subscribers, asking what we were still doing out of stocks. Let me explain.
It’s true — the C Fund (“S&P 500″) has gone up by 18% since March 9. But the relevant question is not whether a fund has gone up, but whether it was possible to make money from it using a method that is consistently profitable. I don’t think that it was. The way I see it, there were only two ways to attempt to make money in stocks. And neither one of them worked.
The first way was to be in stocks for the long term. However, people who were in stocks for the long term actually lost a lot of money. In the past year alone, the C Fund has lost 38%. The I Fund (“Europe Pacific”) has lost a whopping 46%! In just one year. All this, after the recent “rally” is taken into account. In other words, for the people who were in stocks for the long term, the upward move in stocks has not made any money at all — it just slightly reduced their loss.
The other way to attempt to make money from the recent up move was to try to buy stocks at the bottom. Attempting to “pick the bottom” is market timing, which, while it might look good in retrospect, does not actually work. Those people who correctly picked this bottom might have made some money. They would likely not make the 18%, since that would have required buying exactly on March 9. But they would likely make around 5% – 10%. However, the people who attempted to pick this bottom would presumably have tried to pick all the other recent bottoms as well. Looking at a price chart, we see what looked like potential bottoms in January, December, October, September, and so on. All of these formations turned out not to be true bottoms. People who bought stocks at those times lost money. Thus, the bottom picking strategy, while it could have made money this month, would have lost money over the last few months.
The fact remains that the risk of the three stock funds remains unacceptably high. That is why we are still out of them. On the other hand, bonds have strengthened. Thus, we are once again investing some of our money in the money market and some in bonds.
Related posts:
- Bonds continuing to earn money
- Stocks still in a definite downtrend
- Still not time for stocks
- Bonds shaky, stocks resume freefall
- Both bonds and stocks too risky
April 1st, 2009 at 2:03 pm
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