It’s every investor’s dream to time the market. PhD’s in finance and mathematics toil away at market simulations. However, no one has ever developed a system of timing the market that proved to be successful. The variables involved are too complex and the impact of human-driven factors is too high.
Avoid listening to the financial pundits that claim today is a great day or a bad day to get into or out of the market. If they were consistently correct, they wouldn’t bother telling you. Instead, they’d be off adding to their billions.
Consider these ideas:
1. Anyone that could accurately predict short-term changes in the market would find himself among the richest people in the world. There are plenty of wealthy investors, but few of them got that way by predicting short-term changes in the market.
* There are wealthy investors that became wealthy by taking long-term positions.
* Hedge fund managers and mutual fund managers are wealthy, but they get paid whether they perform well or not.
* A few short-term investors have made it big, but they lose money more frequently than they make money. A few big gains can offset multiple losses. It’s a crapshoot.
* In short, no one has consistently done well timing the market. You’re unlikely to be the first.
2. You miss out on too much. When most people try to time the market, they get out too soon. Eventually the market falls, but then they wait too long to get back in. You also face a high opportunity cost. While you’re sitting around waiting, your money isn’t doing much. Studies have shown that it’s more lucrative to stay in the market than to jump in and out.
* Missing out on just a couple of good days has been proven to be a significant disadvantage. From 1993-2013, the S&P rose by an average of 9.2% each year. If you missed out on the 10 best days that year, your annual return would only be 5.4%. It’s not just the gains you miss. It’s the compounding from those gains that you miss out on.
3. The fees associated with buying and selling can add up. Depending on how many stocks you own, you’re losing some money each time you buy and sell. Can you gain enough from timing the market to offset these additional costs and the tax hit? Nope.
4. Taxes. Each time you sell and take your gains, you’re forced to pay taxes on those earnings. That means you have less money to reinvest. Long-term investors enjoy a great tax advantage. The less frequently you sell, the less the tax man cuts into your future. Avoid underestimating the impact taxes can have on your holdings.
5. Buying into the market over time has proven to be an effective strategy. Take a look at a long-term chart of the US stock markets. The gains over time are incredible. Regular investing is the key to wealth. And few investors can outperform a simple index fund. Just keep investing regularly each month.
Attempting to time the market is a mistake. Short-term investing strategies create too many missed opportunities and incur too many costs, including taxes. It might not be exciting to purchase a blue chip stock or an index fund and hold that investment for 20 years, but that doesn’t mean it isn’t effective.
Avoid the temptation to get in and out of the market over the short-term. It’s exciting to attempt to time the market, but remember the impact of missing out on just a couple of high-return days.