Does Timing the Market Really Work?

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submitted by Tim Goodwin

"Timing the market" isn't just the domain of day traders. If you're hoping to buy in at a low price and sell before a big drop, you're a market timer. Whether you do that multiple times every day or just a few times each year, that strategy, while seemingly sensible, won't help you reach your bigger, better future. In your attempt to maximize your ROI, long-term, you’ll end up underperforming. Don’t believe us? 

Why Doesn’t Market Timing Work?  

According to 2016 DALBAR Quantitative Analysis of Investor Behavior, trying to time the market consistently resulted in a lower return compared to a long-term, passive investing strategy. For the individual investor opting for this short-term approach, $100,000 would grow to only $249,000 over 20 years at a 4.67% annual rate of return. However, if that same investor had opted to buy and hold, that same $100,000 would have become $483,000 – nearly twice as much as the market timer. 

Bottom line – the market isn’t always rational, and you can’t know for certain how millions of individual investors are going to behave. You can try, of course, but it’ll cost you. 

Not Convinced Yet?  

According to the S&P Indices Versus Active Scorecard, in 2017, over 56 percent of actively managed funds underperformed the market. When looking at a 5 year period, that percentage grew to 82 percent. That’s a lot of investing professionals trying to guess what the market will do next and failing. And if full-time investors can't get it right long-term, there's no reason or evidence to suggest you will. 

Being a part-time active investor means a lot of stress added and a lot of hours spent hoping to just keep up with the market. And the data doesn’t lie. Unless you’re supernaturally lucky, you’re not even going to do that. You're going to underperform. 

Is It Too Late to Change?  

Trying to time the market seems like the sensible way to invest. Buy low. Sell high. The problem is that thousands of factors affect prices every day, and if investing models programmed by mathematicians can't figure it out all, then you probably can't either.  

Thankfully, there's a better way. So schedule a call with a financial advisor today. They’ll advise you on a better way and help you chart a reliable course to your bigger, better future. The best part? There’s no guesswork involved.