Smashing the Market Crystal Ball

Why must we constantly theorize about the future? We truly believe we can predict things. We do it with this Sunday's football games. We do it with the sex of unborn babies. And we most certainly do it with the market.

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Smashing the Market Crystal Ball

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Click here to see Monday's, Tuesday's and Wednesday's features

"But the smart thing is to try not to predict market," says Meir Statman, a Santa Clara (Calif.) University finance professor, who does work on behavioral finance. "When you get on a plane, you don't predict if this one is going to go down or not. Yet with the market, we rush to the cockpit and try to steer the thing ourselves."

Is it that hard to leave things alone?

For some reason, yes, it is.

You're bound to hear lots of arguments in the coming weeks that purport to be a cure-all for a market rebound. We'll walk through a few of them now and hopefully convince you that they're just a bunch of noise.

With a Republican president in office, the future of tobacco and oil stocks will be rosy

Don't buy anything because of political parties. You have no idea which policies will pass and which will get shot down. And with our split Congress, don't expect any immediate miracles.

Granted, it's not a bad idea to own stocks in either of these sectors. "But the president just is not the reason to get in," says Dee Lee, a certified financial planner and co-author of Let's Talk Money. Buy oil stocks because they're a good hedge for your portfolio, especially because the demand for power and the continual deregulation will help boost the sector. And if you're looking for some safety plays in your portfolio, tobacco and food stocks generally are a good way to go. Use logic, not presidential propaganda, to make investment decisions.

And please don't rely on a tax cut to cure your portfolio's ailments. "Even if a tax plan goes through Congress, you won't feel those effects for at least seven years out," says Lee.

The baby boomers will drive the economy for the next 10 years or so

Sure, the boomers -- those between ages 36 and 54 -- are in positions of power. They are among the leaders of our economy and probably will live longer than their parents. But are they going to drive the economy? Not single-handedly. While they may have more money then their parents did at that age, not a whole lot of it is expendable, notes Lee.

So let's not confuse earnings with net worth. Just because your neighbor's salary is $300,000, if he's living the high-life and spending $290,000 of it just to live, he only has $10,000 for investments and purchases. That's certainly not enough to jump-start the economy.

We will, however, continue to see money coming into the market from 401(k)s and 403(b) plans. "And it may even increase," suggests Patricia Houlihan, chair of the board of governors of the Certified Financial Planners Board. "In the past, when the market was gaining, people were not saving as much because they were counting on a higher rate of return." But with returns dropping by the nanosecond, people will be forced to save more to meet their retirement goals.

The January effect will jumpstart my portfolio

This is nothing new, so don't consider it your portfolio's magic potion.

The January effect is the tendency of all stocks, especially small-capitalization ones, to perform well in the beginning of the year thanks to year-end bonuses and profit-sharing checks flowing into the market. So you just may see a bounce in some of your holdings.

But after those few weeks of money inflows, your portfolio may not look all that different. Trust me, this so-called January effect is not going to be enough to bring your Amazon(AMZN Quote) shares back up to their December 1999 highs.

Mutual funds are holding loads of cash and will start dumping it into the market in the new year. That'll get things moving

At the end of October, the average U.S. stock fund had a 6% cash position, a 13% jump from Sept. 30, making it the highest cash stake in two years. But that 6% still is below the historical average of 7.4%, so is it really all that much cash?

Even worse, there's not much incentive for managers to put that money back into the market. Sure, when the S&P 500 was going up 20% each year, managers looked like idiots if they held too much cash. But with the S&P down 13% so far this year and the Nasdaq off more than 43%, there isn't a great deal of urgency to dump it into stocks. For more on this misconception, check out our mutual fund guru Ian McDonald's recent column.

There is a buying opportunity in the tech sector

Equate it to that $2,000 Armani suit. For many of us, even a 50%-off sale is still no bargain.

So let's just say this once. Just because every tech stock you hold is well off its March highs does not make this a buying opportunity. The Nasdaq is trading at 90 times its trailing 12-month earnings. You call that a bargain? Not when the average S&P stock is trading at around 16 times earnings.

This downturn is just a return to reasonableness, and we may not even be there yet. Be sure to check out Cramer's recent column, detailing why this is not a tech-buying spree.

So why does it feel like everything has plummeted since March? To use Greenspan's words, exuberance and greed.

Many companies had no profits, yet were predicting huge future growth. Realistically, investors knew that, in most instances, it makes very little sense to invest in a company with no cash or profits. But many folks just couldn't sit back and watch their neighbors make money. "Investors put aside sound investment principles because of a Las Vegas philosophy," says Houlihan. So they hopped in anyway. But most found that "hitting it" is unlikely.

So let's say this again. You have no idea who's going to win on Sunday. You cannot accurately predict the sex of a baby by looking at a pregnant woman. And the market is its own beast. Don't try to figure it out. Invest with good judgment and realism, not with a crystal ball or fortune cookie.

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