Mass Market-Timing Mania

Scanning The Wall Street Journal just after the recent quarter-end market dip, the following title caught my eye: "Bad Stock-Market Timing Fueled Wealth Disparity." Speaking of a gap between the haves and the have-nots, you've got to have a paid subscription to read the complete article. But even the teaser is intriguing: "Millions of Americans inadvertently made a classic investment [market-timing] mistake that contributed to today's widening economic inequality: They bought high and sold low."

Considering issues related to the rich getting richer and the poor getting poorer can put a financial advisor on thin ice. But what is a blog for, if not to explore the soft- and hardball challenges that real families face with their real money? So here goes.

The article was accompanied by an interesting table (viewable in this ThinkAdvisor.com reprint), indicating that the percent of stock ownership and total market share has increased for the highest-income families since 2009. These same percentages have decreased for everyone else during the same period.

Do the rich have an edge in the market – maybe even an increasing edge, as the article implies?

In some ways, yes. As the article points out, some hardworking families were hit from multiple directions during the Great Recession. Those who found themselves unexpectedly unemployed or underemployed at the same time that their investments had plummeted may have had no choice but to convert their assets into spending money even if the prices they received were near rock-bottom. And of course many poorer households don't own stocks to begin with – 89% of households in the bottom fifth percentile, according to the article. This of course makes it impossible for these families to directly participate in stock market growth.

That said, in other crucial ways, the market doesn't care one bit whether you're billionaire Warren Buffett or thousand-dollar Joe Schmoe. No matter who you are, if you participate in the market patiently, you can position yourself to be among those who profit from its expected long-term growth by focusing on the more controllable facets:

Manage Your Market Risks - Establish a reasonable safety net of liquid assets so, when the markets turn sour, you can afford to stay invested. If you have more invested than your risk tolerance allows for, you may be forced to sell even if you would have otherwise held firm.

Ignore Your Emotions - Fear and greed tempt you to sell low when market prices tumble or buy high by chasing hot trends. Heed the evidence on how to invest for the long-term instead.

Control Your Costs - By investing in efficiently managed, low-cost, mutual funds, you can expect to keep more of your money for yourself.

We'll leave you with this powerful notion from the WSJ article: "Imagine two well-off households, each with $100,000 in the stock market in 2007. A family that sold in 2009 after losing half its portfolio's value may now have $50,000 in a savings account. A family that held on would now have about $130,000 in stocks. The inequality has yawned merely because of the investing decisions."

In other words, you don't have to be Warren Buffett to perform well in the market. You just need to invest with his level of discipline.