(Continued from Discipline: A Necessary Condition for Successful Investing Part 1 of 3)

Perhaps the greatest anomaly in finance is that while investors idolize Warren Buffett, they not only fail to follow his advice but often do exactly the opposite of what he recommends.

Buffett’s Advice

Warren Buffett, probably the most highly regarded investor of our era, has offered the following advice over the years. Listen carefully to his statements regarding efforts to time the market.

  • “Inactivity strikes us as intelligent behavior.”
  • “The only value of stock forecasters is to make fortune-­tellers look good.”
  • “We continue to make more money when snoring than when active.”
  • “Our stay-­put behavior reflects our view that the stock market serves as a relocation center at which money is moved from the active to the patient.”

Finally, Buffett recommends that if you simply cannot resist the temptation to time the market, then you “should try to be fearful when others are greedy and greedy only when others are fearful.” In other words, stick to your plan by rebalancing, which requires buying when others are panicking.

While it is tempting to believe that there are those who can predict bear markets and, therefore, sell before they arrive, there is no evidence of the persistent ability to do so. On the other hand, there is a large body of evidence suggesting that trying to time the markets is highly likely to lead to poor results. For example, in his book Investment Policy, Charles Ellis discussed a study on the performance of 100 pension plans that engaged in tactical asset allocation (a fancy term for market timing, allowing the purveyors of such strategies to charge high fees). The study found that not one single plan benefited from these efforts. That is an amazing result, as even random chance would lead us to expect at least some to benefit.

Avoiding Investment Depression

If you’re prone to investment depression, one way to help avoid the downward spiral that many investors experience (which can lead to panicked selling) is to envision good outcomes. To help you do just that, I have gone to my trusty videotape and come up with some data that should not only be of interest, but should also enable you to envision positive outcomes.

Over the last 78 years, we have also experienced four quarters in which the S&P 500 lost more than the 20 percent — the four quarters ending September 1974 (­25.2 percent), December 1987 (­22.6 percent), December 2008 (­21.9 percent) and June 1962 (­20.6 percent). Over the next 12 months, returns ranged from 17 percent to 38 percent (averaging 28 percent); over the next 36 months, returns ranged from 49 percent to 73 percent (averaging 60 percent); and over the next 60 months, returns ranged from 95 percent to 128 percent (averaging 112 percent).

By Larry Swedroe

Continue to Part 3 of this series to read more.