“What goes up must come down.” –Isaac Newton
The adage applies to more than just gravity. Most people assume a downturn in the market is inevitable. But is trying to time the market a good idea? Resoundingly, experts agree, No.
There is a vast difference between time in the market and timing the market. Calculating your bets on market timing comes with its own set of dangers.
Here’s a look at why Market Timing doesn’t always pay.
- Emotional choices can add up to big losses: Getting out of the market before a downturn may spare losses in the short term, but it could mean missing out on significant gains. Some of the best days and months of the year in the market can happen after big downturns. Let’s not forget what happened after the financial crisis of 2008—investors who bailed out of stocks ended up missing out on returns from one of the longest running US bull markets. 2
- Short-term market swings are volatile: With media coverage comes sensationalism and impulsive investment decisions. Even professional market timers who pay heed to such swings are rarely, if at all, able to outperform the market.3
- Your timing is everything: To get ahead of a bear market or mitigate a downturn, you need to know:
- the best moment to sell, as well as
- the best moment to buy back into the market
Even if you are able to get one of those timings right, the risk is great that you won’t get both of those timings right.4
So, how can you keep calm in the face of a looming downturn?
- The probability for loss is higher on a given day, but the likelihood of realizing loss decreases with longer-term investments.
- During the 90-year period from 1926-2016, one-year returns had periods of gain 74% of the time, versus a 26% loss period. Five-year annualized returned had gains 86% of the time in the same period, versus losses 14% of the time.5
- A recent study by the Center for Retirement Research looked at the effect of market timing on target-date funds. The findings: funds that were weighted by the age of the fund performed significantly better. Those that deviated from their glide path did not improve and often underperformed.6
…but don’t invest in hype
- Keep in touch with the performance of your accounts, but avoid reacting to media coverage with radical changes in your investment plans.
- Overconfidence does not pay off. A Journal of Finance study7concludes that excessive trading is hazardous to your wealth. In the 5-year period from 1991-1996, those that traded most yielded 11.4% gains—and underperformed the market returns of 16.4%.
Keep your eye on your carrot
The bottom line is that if you are moving in and out of the market based on headlines, economic conditions, or technical data, you may be successful some of the time. But the cost of missing the best 10 days, or even the best month in the market can add up to huge percentage points in missed financial gains.3
When it comes to sound financial health, it’s well worth your while to keep the long-tail view. Talk with a credentialed advisor today to help ensure that you’re on track to meet your short and long-term investment and savings goals.
1TIME Business, “Why Market Timing Never Works” (March 2017)
2GuideChoice, “Why Timing Markets Doesn’t Work – A Better Alternative” (September 2017)
3Index Funds Advisors, Inc. (2014)
4Halpern Financial, “Why Market Timing Doesn’t Work” (September 2017)
5Morningstar, “Fundamentals for Investors” (2017)
6Center for Retirement Research at Boston College (January 2017)
7The Journal of Finance, Vol. LV, NO. 2 (April 2000)