If You Want to Play the Game, You Better Know the Rules

Jim Cramer recently made news when he solemnly pronounced that anyone who may need a significant portion of their invested funds in the next five years should pull them out of the markets.

Investors who followed his advice missed the 11% increase in the markets this past week. So, was Cramer wrong?

Actually, he was right for all the wrong reasons, which brings me to this important rule:

Don't rely on Jim Cramer for investing advice.

If you have a time horizon of 5 years or less, you should not be exposed to any stock market risk. This advice has nothing to do with the present state of the markets, but rather with the historical volatility of stocks.

Stocks are very volatile over short periods of time. If you need the money when they are down, you will be forced to sell at a loss.

Over the past 50 years, an all stock portfolio was down almost 20% of the 589 rolling year periods. But if you held for a minimum five year period, you would have had losses only 2.4% of the time. Over any ten year rolling period, you would never have had a loss.

Cramer is a stock picker and a market timer. His lack of skill in these areas is well documented. His recent bailout advice to his hapless viewers was premised on his market timing skills. Apparently, he felt that the markets were going to continue to tank.

He was wrong. Again.

Smart Investing has nothing to do with market timing and stock picking. It is premised on an understanding of the relationship between risk and return. The risk of owning stocks is too great over the short term. This is true in both bull and bear markets.

Investors who anticipate needing 20% or more of their money within five years should confine their investments to FDIC insured Certificates of Deposit or Treasury Bills.

Jim Cramer and other financial pundits may be worthy entertainment. They are good for ratings and their programs generate serious advertising revenue.

In times of extreme market volatility, investors are tempted to rely on their purported expertise. It is important to realize that their advice is flawed and conflicted.

John Kenneth Galbraith, the famed economist, said it best: "We have two classes of forecasters: Those who don't know--and those who don't know they don't know."


The views set forth in this blog are the opinions of the author alone and may not represent the views of any firm or entity with whom he is affiliated. The data, information, and content on this blog are for information, education, and non-commercial purposes only. Returns from index funds do not represent the performance of any investment advisory firm. The information on this blog does not involve the rendering of personalized investment advice and is limited to the dissemination of opinions on investing. No reader should construe these opinions as an offer of advisory services. Readers who require investment advice should retain the services of a competent investment professional. The information on this blog is not an offer to buy or sell, or a solicitation of any offer to buy or sell any securities or class of securities mentioned herein.