Investment Corner: Timing the market
Beating the market with your investments should be easy. Common sense says that all you need to do is sell your stocks when things are looking bad with the economy, and jump back in when things heat up again. Simple, right?
It turns out that attempting to time the market is one of the biggest reasons that most individual investors do significantly worse than the market itself. In order to time the market, you need to get out at the right time (before it goes down) and then get back in at the right time (before it goes back up). That means you need to guess right twice, which is nearly impossible. Or, as I like to say, “anyone can time the market, just not on purpose.”
The stock market is what we in the financial industry call a “leading indicator”, meaning that it tends to move ahead of the overall economy. By the time you determine that the economy is weak and pull your money from the market, the market has probably already moved lower. And by the time you see the economy strengthen and buy back in, you’ve likely missed the opportunity to fully reap the rewards of the market surge.
The Dalbar, Inc, an independent firm that does an annual analysis of investment behavior called the Dalbar Study, found that the average equity fund investor over the last 30 years has trailed the S&P 500 returns by nearly 3% annually. The biggest reason? Individual investors (people investing on their own without a financial advisor) tend to be inconsistent in their commitment to the market, and as a result leave the market and re-enter later, missing out on critical market increases while they are out of the market. Or, even worse, some investors never get back into the market after they leave, missing out on the entire gains of the market.
Market timing also neglects the benefits of long-term investing. The Dalbar Study highlights how investors who adopt a patient buy-and-hold strategy tend to fare better over time. By staying invested through the market ups and downs, they benefit from the compounding of returns. Long-term investors also tend to pay lower capital gains taxes than frequent traders.
So, what should investors do instead of attempting to time the market? A prudent approach is to focus on asset allocation and diversification. By spreading investments across a variety of asset classes, such as stocks, bonds and real estate, investors can reduce their exposure to the risks of individual assets. Diversification helps maintain a portfolio’s stability over time, even in the face of market volatility.
To conclude, it turns out that market timing is a fool’s errand. The Dalbar Study and a wealth of research underscore the perils of attempting to time the market. By focusing on long-term goals, diversification and disciplined investing, individuals can enhance their prospects for financial success while sidestepping the pitfalls of market timing.
However you choose to make your money, invest smartly and invest well!
Larry Sidney is a Zephyr Cove-based Investment Advisor Representative. Information is found at https://palisadeinvestments.com/ or by calling 775-299-4600 x702. This is not a solicitation to buy or sell securities. Clients may hold positions mentioned in this article. Past Performance does not guarantee future results. Consult your financial advisor before purchasing any security.
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