Are You a Dangerous Investor? Part 2

I'm not saying that there's no place for market timing. But let opportunities in the market dictate that timing, and don't embrace the all-or-nothing approach. Add to or deplete cash reserves as a function of specific opportunities (i.e., bargains) in the stock market.

They don't pay attention to market history.

Ignorance of market history often leads to poor capital-allocation decisions, and it's very dangerous to your financial health. Over the long term, the return from stocks is double the return from bonds. So after a three-year bear market in equities, the first since Pearl Harbor, and a 20-year bond rally from 1982-2002, a once-per-century bull market in bonds, what did investors do? According to data on mutual fund flows, they stampeded out of equities and into bonds.

History shows that unless you buy at a market peak, such as in 1929, 1973 or 2000 (almost certainly a multiyear peak in the Nasdaq, at least), the probabilities are enormously high that you'll make money in equities if your time horizon is five years or more.

Here's one more nugget on market history, from an issue of The Turnaround Report, written near the low in the stock market last Oct. 28:

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"I can't find an economic period in the past 100 years during which the economy sank in the face of a steep yield curve (meaning that long rates are much higher than short rates). The yield curve is now at its steepest slope in modern economic history."

Everyone's saying that the market's too high and that we're overdue for another leg down in a long-term bear market. The fact is that since I penned the aforementioned quote, the yield curve is even steeper. Fasten your seat belt; if history is any guide, this economy is set to rock and roll.

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At time of publication, Alsin and/or ACM was long IMS Health and Humana, although holdings can change at any time.

Arne Alsin is the founder and principal of Alsin Capital Management, an Oregon-based investment advisor and portfolio manager of The Turnaround Fund, a no-load mutual fund. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Alsin appreciates your feedback and invites you to send it to [e-mail]. Click here to receive Arne's latest favorite stock picks from his newsletter, The Turnaround Report.