Investment Tips – Invest at the Point of Maximum Pessimism

This is the first in the series of investing tips that I’ll be discussing.  The latest copy of Forbes magazine has a list of 365 tips on investing to get rich.  I thought I’d go through some of the interesting ones and comment on them.  The first of these investment tips comes from John Templeton: “Invest at the Point of Maximum Pessimism“.

Investment Tips: Invest at the Point of Maximum Pessimism – Background

It goes without saying that anyone reading this is familiar with the financial crisis of 2007 – 2009.  During this event trillions of investment dollars were effectively vaporized.  Fear and panic set in among the general public.  The Dow Jones Industrial Average and the S&P-500 indexes dropped more than 60% in a matter of 16 months.  For some folks that panicked and sold their investments for a loss, they may never really recover.

Investment Tips: Invest at the Point of Maximum Pessimism – My Story

Let me start by telling you that this is an example of what not to do  🙂  I’d been investing regularly in my 401K through work ever since I graduated college in 2003.  I was putting in a hefty 16% and was happy with my investment direction.  Then, the financial crisis began…

I largely ignored most of it the first couple of months that things started to drop.  I began to get nervous when we got around 8,500 or so on the Dow.  I remember waking up one morning in October and seeing that the Dow futures were “limit down” 550 points.  Well dear readers, it was like something snapped in me that day.  My Brain grew two sizes too small!  I decided to move my 401K over to a “stable value” fund to limit any further losses.  A “stable value” fund is basically a money market account.  It seemed like a rational thing to do at the time.

I was convinced that the Dow was going down to 6,500.  I discussed this with just about everyone I knew, and they all thought I was crazy.  “It will never go that low,” they said.  “You’re on drugs!”

Investment Tips: Invest at the Point of Maximum Pessimism – Point of Maximum Pessimism Reached

Well, sure as the sun comes up in the morning, the Dow hit 6,500!  I was right!  Now, that prediction and a quarter would buy me a cup of coffee.  I’d need to act on this prediction if I was going to come out ahead.  I felt a great sense of pride that I was able to see what so many others had not.

There was just small little problem…  I did not take action!  This is the point where things really fell apart.  Even though I had a sense we had hit bottom, everyone else was still panicking.  Pessimism had reach record heights!  For some reason, I could not bring myself to switch my 401K back over into index funds.  I left it in cash (money market fund).  I was too afraid of facing the possibility that I could lose even more money.

Then, a funny thing started to happen.  The market began to rise.

There were days in March and April of 2009 where the Dow was up 300 – 500 points in one day.  This is just a bounce I thought.  Nothing is fixed, it will come back down.  Well, we all know now that the market never went lower.  We put in a market low on 3/9/09 and never looked back.

Then the Dow got up close to 10,000.  “It’ll never cross 10,000,” I thought.  I left my investments in the stable value fund and continued new contributions to the stable value fund.  “Once it drops back down, then I’ll invest,” I told myself.

The flash crash of 5/6/10 convinced me for a while that the markets were in for more pain.  “I’ll wait till things go much lower, then I’ll get back in,” I thought.  We went lower for a month of two, then continued our long climb upwards in global markets.  I continued to keep my 401K investment in the stable value fund and continued to direct new 401K contributions to the stable value fund.  I could not admit that I was wrong…

Investment Tips: Invest at the Point of Maximum Pessimism – How Could I Have Screwed Things Up so Badly?

So, here we are at record highs on all US indexes, and I’ve missed the entire move up and “locked in” substantial losses.  I’ve probably lost 5-6 years out of my retirement by trying to time the market!.  I could not bring myself to invest at the point of maximum pessimism!

To me, this investment tip that Forbes gives is very misguided.  It assumes that investors are trying to time the market.  Every thing I’ve learned from: my own personal experience, reading half a dozen personal finance books, and hundreds of blog finance posts, tells you not to try and time the market.  It is a fools errand, and you’ll almost always come out worse off over the long run.

Investment Tips: Invest at the Point of Maximum Pessimism – Final Thoughts

So, what did I learn from this monumental screw up?  Maybe those elite few can get lucky, but I learned that and investment tips that encourage trying to time the market are insanity with a capital “i”!  It’s nearly impossible to time the market accurately over a lifetime of 40-50 years of investing.  You’re more than 95% likely to screw yourself royally just like I did!  Maybe not quite as bad – I think I win a gold medal for the biggest investment epic fail!  You may get it right once or twice, but it’s nearly impossible over the long run.  I’d liken it to playing Russian Roulette – one wrong move and your life will never be the same 🙂