Patience Pays When Investing in ETFs

The flip side of flipping ETFs is buying and holding them, which is almost certain, in the long run, to bring results far superior to market timing. It’s the corollary to choosing ETFs over stocks. Study after study shows that the markets are, by and large, efficient.

What does that mean? So many smart players are constantly buying and selling securities, always on the lookout for any good deals, that your chances of beating the indexes, whether by market timing or stock picking, are very slim.

One of but many studies on the subject, “The Difficulty of Selecting Superior Mutual Fund Performance” by Thomas P. McGuigan, appeared in the Journal of Financial Planning. McGuigan found that only 10 to 11 percent of actively managed mutual funds outperform index funds over a 20-year period. (Active managers are professionals who try to pick stocks and time the market.)

We can probably safely assume that the professionals do better than the amateurs, and even the professionals fail to beat the market 90 percent of the time.

Timing doesn’t work because markets are largely random. The unpredictability of the stock market (and the bond market, for that matter) never ceases to amaze me. Just when things seem certain to take off, they sink. Just when they seem certain to sink, they fly.

Crises do not necessarily result in stock market crashes. Keep in mind that 1918, the year of the worst pandemic in world history, was a good year for stocks. 1962 (Cuban Missile Crisis) was a very good year. 1942 (Japan attacked Pearl Harbor; Hitler marched across Europe) wasn't too bad, either.

In contrast, let’s look at the worst years for the stock market. In 1929, nothing catastrophic was going on. Ditto for 1987. Ditto for 2000.

Of late, we’ve been though yet another of history’s worst years for the stock market. That was 2008. While there was something of a banking crisis going on, the demise of Lehman Brothers really doesn’t compare to Hitler’s blitzkrieg of Europe.

You can't explain the incredible unpredictability of the markets. You can only understand these historical truths.

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