I don't advocate trying to time the market. It's impossible to predict with any kind of consistent accuracy what the stock market will do, and the impossibility increases - regardless that the concept defies logic - as the time frame is shorter. I'm still looking at a horizon far enough in the distance that the day-to-day, week-to-week, or even month-to-month volatility doesn't bother me that much. My life is reaching the point where I would prefer my investments start generating income rather than just building wealth. Were those the only two choices, I'd be fine, but there is always the possibility of losing money. Call me crazy, but that's what I'm trying to avoid. With the election somewhat behind the country, I wasn't surprised with the immediate reaction in the stock market. It's hard to say exactly why the S&P index moves one way or another in the course of a day, an hour, or a minute, but the financial news media sure does try hard to align an effect with an apparent cause. And the stock market dropped the day after President Obama was re-elected. Despite the fact smart money had been on Obama, with Intrade, Nate Silver, and most of the polls all pointing towards a Democratic victory. I half assumed Obama's victory had already been “priced in” to the market. Panic in the financial markets, at least for a day or so, kicked in. And that triggered my investing muscle. If everyone's panicking, it must be a good time to buy into the market and walk out with some bargains. After all, historically, the markets and the economy fare better under a president who is a Democrat than they do under a president who is a Republican. (FOX Business cites a McGraw-Hill study that shows the S&P 500 averages a return of 12.1% per year while Democrats are in office compared with 5.1% per year for Republicans, and the GDP increases 4.2% per year for Democrats and 2.6% under Republicans.)
Past performance doesn't guarantee future results - but my money is on the fact that it's a good idea to invest while the financial industry is panicked with the thought of a business-friendly Democrat leading the economic destiny of the country rather than a moderate Republican. And this is just the beginning. Over the next few months, the story leading the financial news is going to be the so-called “fiscal cliff.” Just like the debt ceiling arguments that gripped the nation last year, creating some kind of fake drama everyone knew would be resolved in the end, but the uncertainty held the economy back, I expect these issues to be resolved, though probably at the last minute.We, as an American audience, have proven we love drama, even when fake. Today, government is not much more than a reality television show - and the word “reality” is used ironically. Just like the Real Housewives are staged, so is much of the modern political process, to the benefit of the massive media conglomerates that sell advertising time on their networks. That isn't to say the problems we're facing aren't real, but they aren't worthy of inducing fear-based decision-making. The public seems to be panicking needlessly about the economy, and this puts the country into a drama feedback loop. It's doubtlessly assisted by business owners who have the opportunity to blame the government for the layoffs they need to enforce because they are part of a dying industry that has made no attempts to modernize or react to a changing public perception. These dramatic times are necessary for savvier investors to find great opportunities. These usually come in the form of starting businesses amid turmoil or those who have an opportunity to be an initial investor in something groundbreaking. Those who survive when everyone else is too scared to start something will thrive. This bleeds into the market in general, too, which is why Warren Buffett's motto is to be greedy when others are fearful, fearful when others are greedy.
Others are fearful right now, and they will be at least until the season finale of Fiscal Cliff. So I'm taking this as an opportunity to set up an automated investing plan that increases my exposure to a wide range of investments, stocks and bonds, over the course of the next few months. There are two possible outcomes, and when I take a moment to analyze this, I find out that I'd have been wrong in both situations.The first is that the market increases over the next few months. I took the wrong action because rather than investing a lump sum today, I spread it out over time, getting worse deals for my money along the way. The second is that the market doesn't increase over the next few months, in which I would have done better by not investing until the end of the period if at all. Without knowledge of the future, I can reduce my pricing risk by dollar-cost averaging my investment. This may be the wrong reason to dollar-cost average, but it feels less riskier than putting a lump sum into the stock market right now, at a time when I expect drama and volatility to increase approaching the end of the year. And as December 31 approaches, it might become clearer whether tax rates on long-term investments will increase. If they do, people who believe their investments are good due only to the favorable tax rates will sell, creating more opportunities for people who believe the investments are good regardless of tax rates to find fair-priced purchases.