A recession is coming! Get out of the market! Buy gold! Buy defensive stocks like Berkshire Hathaway
Surely you've seen headlines like these, and you've probably wondered if you should be making changes to your retirement portfolio. After all, things are clearly going downhill, aren't they? Shouldn't you be thinking about getting out of stocks altogether, at least until things turn around?
If only it were so simple.
How's your timing?
This business of shifting in and out of asset classes in response to anticipated marketwide swings has a name: market timing. And it also has a reputation: easier said than done.
It certainly sounds like a good way to approach investing. As we all know, markets move in cycles, and if we could figure out how to be fully invested in times when markets are moving up, and then take our money off the table when things are headed down, we'd make a heck of a lot more money.
And although some Fools are skeptical of the idea, there are investors who believe they can do exactly that, using a variety of measures and tricks. Portfolio manager Ken Fisher, who famously called the top of the dot-com driven market in 2000 (and rotated his clients out of technology and Internet darlings like Cisco
Fisher's analysis looks at a lot of factors, but a key one is sentiment -- specifically, the level of optimism or pessimism among market participants. The idea is that the market shifts direction when one of these factors peaks. When it seemed that the last of the cautious investors were embracing the tech boom in early 2000, for instance, Fisher saw that as the peak and got out.
Likewise, when it seems like everybody has become a pessimist and is ready to bail out of stocks, the current slide will reverse -- or so goes the theory.
Of course, Fisher has a lifetime of professional experience, a dedicated team of researchers, and access to extensive proprietary databases to help him make his guesses. And even he, by his own account, got back into the market a year too early after the dot-com crash.
Is there any way we part-time non-professional individual retirement investors can make market timing work for us?
Making it work ... maybe?
In the new issue of the Fool's Rule Your Retirement newsletter, available online at 4 p.m. Eastern time today, lead advisor Robert Brokamp puts the idea of market timing on trial. Like all of us, he has been intrigued by the idea of market timing, which would be so elegant if we could just make it work.
But as we know, that's not so simple. Echoing Fisher's experience, Brokamp points out the key difficulty with market timing: You have to be right twice. In order to really make it work, you have to sell at the right time and buy back in at the right time. And buying back in can be tricky, because the first legs of new bull markets tend to be sharp upward spikes. If you're even a little late, you lose a lot of potential growth.
Is there a way for us ordinary individual investors to make it work? You'll have to read the results of Brokamp's "trial" to find out. Judge Brokamp reviews all the evidence for both sides, pro and con, and comes to a verdict that might surprise you.
If you'd like to read the article, be our guest with a complimentary one-month pass to Rule Your Retirement. The pass will give you full access to today's new issue, all back issues, all of the members-only resources that support the checklists in the new issue, our special members-only discussion board for your questions and ideas, and a unique set of planning tools to help you create your own plan for retirement.
Fool contributor John Rosevear owns shares of Berkshire Hathaway, but does not hold positions in any of the other stocks mentioned. The Fool also owns shares of Berkshire Hathaway, which is a Stock Advisor and Inside Value pick. Kraft Foods is an Income Investor recommendation. Amazon.com and Yahoo are Stock Advisor recommendations. The Motley Fool's timeless disclosure policy keeps everything on the up and up.