by Tyler Curtis
Since the beginning of the year the S&P 500 is up nearly 8 percent. This quick jump in the stock market has taken place despite the fact that much of the debt crisis remains unresolved in Europe as well as in Washington. China’s economy is showing signs of slowing while inflation fears could lead to a surge in emerging markets. All the while a presidential race is heating up and the prognosticators are calling for all sorts of calamity. This surge has sparked frenzy in the media bringing about various predictions from financial pundit bulls and bears.
Looking through the financial media it doesn’t take long to find opposing opinions from well revered financial experts. Just last week Warren Buffet, one of the most famous investors of all time, released an adaptation of his annual letter to Berkshire Hathaway shareholders for a fortune magazine article: Warren Buffet: Why stocks beat gold and bonds. In the article Mr. Buffett expresses his belief that equities will continue to outperform the alternatives over the long run. Bill Gross who has been nicknamed the bond king for his successes in bond trading has also expressed his newfound bullishness on equities. However not everyone agrees with these two well respected investors, last week hedge fund titan John Paulson released a letter predicting that a “Greek payment default could be a greater shock to the system than Lehman’s failure, immediately causing global economies to contract and markets to decline.”
With all these contradicting predictions floating around in the media, what is an investor to do? Who should they follow? As we have pointed out many times before chasing high returns by jumping in and out of the market is a fool’s errand. It can be compelling to think that this time is different or that one of the talking heads on television has finally figured everything out. However if history has taught us anything it is that making investing decisions based on emotion or market timing is detrimental on investors portfolio over the long run. For example, the Dalbar Group has evaluated investor performance over the preceding 20 year period each year since 1984. In the 20 year period ending in 2003, the average stock market timer lost 3.29%. In the same twenty years, the market itself went up an average 12.98% per year.
There is no reliable way to predict what the markets will do in 2012, smart investors will ignore the market noise and adopt a disciplined investment strategy that does not allow their emotions to inhibit the investing process.