by Archie M. Richards, Jr., CFP^®
March 26, 2001

A recent column of mine suggested that experts who advise the sale of stocks in an effort to time the market should be disregarded. Dante, 70 years old, writes with some frustration to ask what experts or guidelines could have improved the timing of sales of his Qualcomm stock.

In September 1997, Dante bought 300 shares of Qualcomm at $54, costing $16,200. When the price reached $71, his broker suggested selling, but Dante held. The price fell to $14, and again he held. In May 1999, despite the broker's advice to hold, he sold 100 shares at $119, leaving 200 shares.

After two stock splits (a two-for-one and a four-for-one), Dante held 1,600 shares. In December 1999, he wanted to sell at $170. But based on the recommendation of a prominent stock analyst, the broker talked him out of it. A week or two later, Qualcomm peaked at $185 and fell hard. When Dante wrote me in March 2001, he held 1,600 shares at $52.

Let's see now, my friend, you bought the stock for $16,200. Twenty months later, you sold a portion for $11,900. Twenty-two months after that, your shares were worth $83,200. Using an internal rate of return calculation (which would take a entire article to explain), I compute your return at 58 percent per year.

And you're complaining?

Oh, I get it: If you'd bought the shares for $16,200 in September 1997 and, after the splits, sold the whole kaboodle at $170 in December 2000, you'd have come out with $408,000 for a return of 103 percent per year. You're asking what experts or guidelines would have helped you to accomplish this?

You present a fine demonstration that people feel more strongly about ill fortune than they do about equivalent good fortune.

Here's the skinny: No guidelines, no market expert, and certainly no hotshot stock analyst could have pulled a rabbit out of that hat. You did well, Dante, far better than you should expect to do in the future. Be glad that you had a profitable visit from that wonderful woman, Lady Luck.

Having read my recommendations to use index funds, Richard writes that five growth index funds he knows of had losses last year averaging 15 percent.

Don't buy growth index funds, Richard. Those concentrate on stocks that have higher price/earnings ratios. Instead, pick the broadest possible index funds covering stocks worldwide. These declined in value last year, too. But in the long run, maximum diversification, low costs, and low turnover produce the best returns.

A headline in a recent money magazine read, "The Seven Best Mutual Funds for This Market." The words "this market" imply that the authors have the market nailed, down pat, and classified. The headline, and portions of the article as well, imply that what the market has been doing it will probably continue doing, at least for a while.

Useless balderdash! Often, at about the time a downtrend becomes obvious enough to generate bearish headlines, the market begins to rise.

The aforementioned article recommends four mutual funds for a downturn and three for a rebound. Stock mutual funds for a downturn? If we're holding cash and we know there's going to be a downturn (which we don't), why would we buy stocks at all? But if we're already holding stocks, why would we move to something else and then jump to a third investment for the rebound? How ridiculous!

The same goes for the 20-percent, bear-market nonsense we've heard about lately. When an index closes down 20 percent from its peak, market experts identify this as a bear market. But as to stock prices thereafter, those proclamations mean nothing. The market disregards all such drivel, and so should you.

In 1998, the U.S. Justice Department gave $123,028 to a high school to study the problem of bullying. In 1999, the Department added $14,454 for the same purpose. In 2001, at that very school, Santana High, 15-year-old Charles Andrew Williams, who was said to have been a victim of bullies, went on a killing spree.

The federal grants worked great, didn't they?