If you’ve ever felt tempted to pull your money out of the market during a downturn, or jump in when everything seems to be skyrocketing, you’re not alone. The idea of “timing the market” can feel logical, but the truth is trying to time the stock market is one of the easiest ways to derail your long-term financial goals.
Let’s dig into why that is and what a better strategy might look like.
What Is Market Timing?
Market timing is the practice of moving your money in and out of the stock market (or specific assets) based on predictions of what the market will do next. The goal is to sell investments before they drop and buy before they rise. Sounds simple enough, right? The problem is you not only have to make one but TWO perfect predictions: when to get out of the market and when to get back in. No one, not even seasoned Wall Street professionals, can predict the market with any consistent accuracy.
The Cost of Missing the Best Days
One of the biggest risks of market timing is missing out on the market’s best-performing days, which tend to come right after the worst ones. Unfortunately, many “market timing” investors are on the sidelines when those gains hit.
Let’s look at the data, from 2003 to 2023, the S&P 500 had an annualized return of about 9.7%. If you missed just the 10 best days in that 20-year span, your return would drop to about 5.6% annually. If you missed the 20 best days, you’d be looking at 3.3% annually. Here’s the kicker: 6 of the 10 best days occurred within two weeks of the 10 worst days. That means pulling out during volatility could cost you the exact upside you’re hoping to capture later.
Emotional Investing: Your Brain Is Working Against You
The market is unpredictable, but our emotions are often very predictable. Fear and greed are powerful forces. When markets crash, fear drives investors to sell at the worst possible moment. When markets rally, greed drives people to buy high, chasing returns. These instincts are totally human, but they can lead to bad financial decisions, like panic-selling at the bottom or FOMO buying near the top. Trying to time the market based on how you feel is not a prudent investment strategy… it’s a gamble.
A Better Approach: Time in the Market > Timing the Market
I’d be surprised if any of my clients have not heard these words come out of my mouth: “It’s not about timing the market; it’s about time IN the market.” Staying invested through the ups and downs has historically rewarded patient investors. The market doesn’t move in a straight line, but over time, it tends to trend upward.
Here are some tips that I encourage my clients to consider:
- Invest with a plan: Your investment strategy should be based on your financial plan which has clearly defined goals and time horizons.
- Stick to your strategy: Don’t let headlines dictate your decisions.
- Keep cash for short-term needs: You won’t be forced to sell investments for distributions when (not if) the market is down. I advise my clients to keep an estimated two years’ worth of cash needs in a “managed cash” bucket.
- Diversification: Maintaining a diversified portfolio across different asset classes and geographic areas helps to reduce the overall volatility of the portfolio.
- Rebalancing:
- Consider rebalancing your portfolio based on relative value. If you feel something is overvalued, you may want to sell it in favor of another position that may be undervalued.
- Adjust your portfolio objectives based on changes in your goals, not based on short-term market volatility.
Final Thoughts: Stay the Course!
Market timing might feel like you are taking action or give you a sense of control; but more often than not, it’s an emotional reaction disguised as a strategy. Long-term investing is like sailing: you have a well-built boat (your financial plan) and a charted route to get you from point A to point B. When life gets in the way and pushes you a little off course, you already have a plan to make minor course corrections to help you get back on track towards your destination (your goals).