The Myth of Market Timing: How Emotional Investing Can Lead to Poor Outcomes

Stock market fluctuations are a natural part of investing, but they can sometimes challenge even the most seasoned investors. In moments of uncertainty, fear can drive a rush to sell, while the optimism of a rally can lead to overconfidence. And in either case, these types of emotional reactions can have a serious impact on long-term financial success.

The truth is, market timing—trying to predict the best moments to buy or sell—rarely works, especially for high-net-worth investors who may feel they have the expertise or resources to outsmart the market. Understanding the psychological factors behind these emotional impulses can help you avoid making costly mistakes and help ensure you stay on track with your financial goals.

The Psychology Behind Market Timing

The desire to time the market is deeply rooted in human psychology. Two emotions in particular—fear and greed—often drive investors’ decisions.

• Fear: When markets are volatile or experience sharp declines, investors may fear further losses, prompting them to make snap decisions, such as selling off their investments to "cut their losses." In the midst of a downturn, it’s easy to let short-term fear override long-term strategy.
• Greed and Euphoria: On the other end of the spectrum, during periods of strong market performance, investors may become overconfident and driven by the fear of missing out (FOMO). They jump in during market highs, hoping to secure profits, often buying assets at inflated prices.

This emotional push and pull causes many investors to chase returns during bull markets and run for the exits when things get tough, which ultimately leads to buying high and selling low—exactly the opposite of a sound investment strategy.

Take the tech boom of the late 1990s as an example. Many investors rushed to buy technology stocks during the market euphoria, only to sell off their holdings after the bubble burst in 2000. The emotional impulse to cut losses during a downturn resulted in missed opportunities for those investors to benefit when the market eventually rebounded.

This buy high, sell low behavior is especially damaging because it leads to locking in losses, compounding the damage and making it much harder to recover financially.

The Impact of Loss Aversion During Downturns

As humans, we’re wired to feel the pain of loss more intensely than the pleasure of gain—a concept known as ‘loss aversion.’ So, while market rallies can most definitely trigger excitement, it’s no surprise that market downturns are often felt more viscerally since the fear of losing wealth outweighs the desire to accumulate it.

Consider the 2008 financial crisis: Many investors panicked as stock prices fell, selling off holdings in an attempt to limit losses. And many of those investors never got back into the market, resulting in lost gains. Moreover, while some investors eventually did re-enter the market, it was after the market officially bottomed in March 2009, causing them to miss the best recovery days.

However, those who stuck with their investments and avoided selling at the bottom were eventually rewarded as markets recovered and went on to hit new all-time highs.

And here’s something to consider as well: Panic selling often backfires since markets tend to rally relatively quickly after a market downturn. For example, our internal Allworth data shows that after a market drop of 20%, stocks typically average gains of:

• 6% over the next six months
• 19% over the next year
• 46% over the next three years¹

A similar trend occurs after an even bigger drop. In the wake of a 30% market loss, stocks experience average gains of:

• 9% over the next six months
• 25% over the next year
• 43% over the next three years¹

In hindsight, it’s clear that selling during a market low is typically a poor decision, yet emotional reactions can make it difficult to think long-term when faced with immediate volatility.

The Overconfidence Bias

Another factor that leads many investors to believe they can successfully time the market is overconfidence.

In some cases, high-net-worth individuals often believe their knowledge, experience, or access to information gives them an edge over others in predicting market movements (and remember, you would have to be right twice—you would need to know when to get out and when to get back in). While extreme confidence can be an asset in many areas of life, it can be detrimental to investment success.

In reality, no one can predict the market with any consistency. Markets are influenced by an array of unpredictable factors—from geopolitical events to technological breakthroughs—and even the most experienced investors and economists often fail to forecast market movements accurately. For instance, did you realize that only 13% of fund managers overseeing actively managed mutual funds and exchange-traded funds beat the S&P 500 in 2024?²

What can be said with certainty is that markets go through cycles. Our internal Allworth data shows that there have been 12 bull markets and 11 bear markets since 1949, and stocks posted 12% annualized total return across all time periods.³ Knowing this, and recognizing that market downturns are temporary, should give you a different kind of confidence—the confidence to stick with your investment strategy when times get rough.

The True Cost of Market Timing

The long-term performance data consistently shows that attempting to time the market leads to missed opportunities. But what does that mean in actual dollar value?

According to our research at Allworth, an investor with $1 million invested in the S&P 500 who missed just the 10 best days over a 20-year period would have $3 million less in earnings compared to an investor who stayed fully invested over that same time.⁴

This highlights the importance of staying in the market through its highs and lows—because you never know when those best days will occur.

The Importance of Having a Financial Plan

All of our aforementioned advice about staying true to your long-term strategy is only effective if you have a customized financial plan in place to begin with. Without a clear strategy aligned with your unique goals, time horizon, and risk tolerance, it can be easy to be swayed by market fluctuations and emotional impulses.

No matter your amount of wealth, a well-crafted, comprehensive financial plan provides a roadmap for your investments and helps you stay grounded, even when markets are volatile. It should consider factors such as your income needs, retirement goals, tax planning strategy, estate planning, and any other financial objectives.

With a personalized plan, you can determine how much risk you’re comfortable taking, the appropriate asset allocation, and the best ways to diversify your investments across different asset classes, minimizing the temptation to chase returns during a market rally or panic sell during a downturn.

Final Thoughts

While market timing may seem tempting in moments of market highs and lows, emotional investing often leads to buying at the wrong time and selling at the wrong time. History shows that sticking to a long-term strategy—while also backed by the power of diversification and the guidance of a trusted fiduciary financial advisor—tends to yield far better results over time.

Rather than trying to outsmart the market, focus on your broader financial goals and the bigger picture. After all, time in the market is more important than trying to time the market.

Is your financial plan a comprehensive reflection of the goals for your wealth and built to weather market volatility? Reach out to learn more about how our team of experts can craft a customized financial plan, just for you.

1 Allworth internal calculation. Average S&P 500 cumulative total returns following large price declines from 1949-2024.

2 https://www.morningstar.com/news/marketwatch/20250118291/most-mutual-funds-dont-beat-the-market-but-whats-the-market-anyway

3 Allworth internal calculation. Based on the S&P 500, 1949-2024.

4 Allworth internal calculation. Based on a hypothetical $1 million investment in the S&P 500 Total Return over the past 20 years. Missing the 10 best days would result in a 6.1% annualized return ($3,283,976) compared to a 10.3% annualized return ($7,167,086) if stayed full invested.

The information presented is for educational purposes only and is not intended to be a comprehensive analysis of the topics discussed. It should not be interpreted as personalized investment advice or relied upon as such.

Allworth Financial, LP (“Allworth”) makes no representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of the information presented. While efforts are made to ensure the information’s accuracy, it is subject to change without notice. Allworth conducts a reasonable inquiry to determine that information provided by third party sources is reasonable, but cannot guarantee its accuracy or completeness. Opinions expressed are also subject to change without notice and should not be construed as investment advice.

The information is not intended to convey any implicit or explicit guarantee or sense of assurance that, if followed, any investment strategies referenced will produce a positive or desired outcome. All investments involve risk, including the potential loss of principal. There can be no assurance that any investment strategy or decision will achieve its intended objectives or result in a positive return. It is important to carefully consider your investment goals, risk tolerance, and seek professional advice before making any investment decisions.