Everyone likes to be the genius who called the top of the market. One of the great things about being a pundit—financial or otherwise—is that as long as your call is big enough, you only need to be right once in your career. As you can imagine, this creates some perverse incentives (although it seems to work out pretty well for the financial media).
But the thing is, you can’t actually predict what the market is going to do next. There’s no way to know where the top of the market is going to be—we could hit it next week or the markets could keep going up for the next three years. We just don’t know.
But someone will get it right just by chance, and they’ll get a nice gig on CNBC for the next couple of years as a result.
Trying to predict the top just leads to lower returns. As the saying goes, the markets can stay irrational longer than you can stay solvent. If you get out of the market (or worse, start shorting) because you know when the market is going to crash, you’re in a pretty tight spot if you’re wrong.
But let’s say that you are right—you correctly called when the top was going to be. You still need to be able to figure out when to get back into the market.
There’s a good chart in the article that demonstrates how all of the big drops in the market when everyone thought the world was ending were just detours on the markets long upward climb. A lot of those detours ended pretty abruptly. Historically, markets have rebounded pretty quickly after sharp declines. If you don’t call the bottom correctly as well, you miss out on those returns too.
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