In this video, we discuss why trying to time the market is a big mistake.
The issue with trying to time the market is that you have to make two correct decisions. When to sell and when to buy back in. You know the old investing principle – “buy low and sell high,” but it can very difficult to know when the market is approaching a peak or a trough. While few investors may find some success in the short-term, there has been no research to prove that people can consistently time the market over the long-term.
What happens is people fall into this trap, likely costing themselves thousands or even tens of thousands of dollars that could have been put towards their retirement.
To illustrate how difficult it is to time the market – if you invested $10,000 in the S& P 500 index on January 1st, 1998 and you left that money in the stock market, over the next twenty years you would have experienced an average annual return of 7.20%. But, if you missed just the 10 best days, over the course of 20 years, you would have only experienced a 3.53% annual return. That is less than half of what you would have earned if you stayed fully invested. And if you missed the best 20 days, you would have barely made more money than you originally put in. But with increases in inflation, your money was probably worth less than it was twenty years ago.
Sadly, many investors experience performance numbers that closely resemble to missing the 10 best days because they get scared when there is volatility in the market and they only put their money back in once they are confident the storm has passed. The problem is that by the time investors get the confidence to buy back in they’ve already missed a lot of the rebound.
Here is a quick fact that you should remember whenever you are thinking about getting out the market whenever there is a pickup in volatility. 6 of the best 10 days occurred within 2 weeks of the 10 worst days. It’s often darkest right before the dawn.
The bottom line is that timing the market’s top and bottom is virtually impossible to do on a consistent basis. A better approach is to have an investment plan in place that will guide your decisions, rather than impulsively selling your investments at the worst possible time.