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In conversations about the stock market, you frequently hear the word “time.” People talk about whether it’s a good time to get in or out of the market, or a good time to buy or sell stocks in a particular sector or industry.
These comments reflect a common misconception: that anyone could know the best time to invest or divest.
When investors think about the market in terms of timing, they are unwittingly playing with fire. Market timing—the practice of buying or selling stocks based on what you think is about to happen—is a loaded issue. Successful investors avoid it, but while many others practice it—to their peril.
The bottom line is that playing the game of market timing is costly and potentially destructive. As no one knows what the market is going to do in the short-term—it’s totally random—there’s no way to know when’s a good time to get in or out. Market timing is simply a form of dangerous speculation.
Abundant research shows that the market is up most of the time. If you’re not in the market on those days, you miss out. So the best time to invest for long-term goals is immediately—as soon as the money becomes available.
The timing of your exit from the market should be driven by your financial plan, not some gut feeling or screaming headline.
Historically, the market’s biggest gains have occurred in unpredictable bursts on precious few days; you have to be in the market on those days to benefit.
To this, some might say: But won’t this put you in jeopardy on the days when the market drops steeply? This isn’t a problem if you are invested properly, according to a sound financial plan. The key is to have a well-diversified portfolio that includes low-cost index funds, and adequate amounts of cash and government bond funds to meet near-term needs.
As the market has been up daily two-thirds of the time, this strategy will likely pay off if you stay invested for the long term. Many investors who plan to follow this strategy occasionally get spooked by a downturn and pull their money out of the market after it has already dropped substantially. Then, after the market is headed upward again, they buy back in, often at higher prices. They would be much better off if they had just stayed in the market.
Warren Buffett, the most successful investor on the planet, has denounced market timing and the forces that encourage it: "We've long felt that the only value of stock forecasters is to make fortune-tellers look good. I continue to believe that short-term market forecasts are poison and should be kept locked up in a safe place, away from children and also from grown-ups who behave in the market like children."
Buffett calls market fear and greed “super-contagious diseases,” as the epidemics that they ignite send the market spiraling upward or downward. He recommends index funds so strongly for most investors that he plans to leave assets to his wife in these investments.
By resisting the allure of market timing and instead maintaining a well-diversified portfolio, you can get safely through any kind of market weather, avoiding hair-pulling decisions about getting in or getting out. This way, you a turn a blind eye to sudden market changes.
By all means, avoid market timing. Instead, develop a written financial plan that will stand the test of time because it accounts for the normal short-term movements of the market.
Tim Decker is president of ISI Financial Group (www.isifinancialglroup.com), a wealth management firm in Lancaster, and a fee-only financial planner (he sells no products). His weekly call-in radio show, Financial Freedom, airs Saturdays at 10 a.m. on WHP580 AM.
This content is based upon information believed to be accurate by ISI Financial Group, Inc. However, it is not intended to provide specific financial advice. You should always seek professional guidance before making any financial or legal decisions, as everyone’s needs are different.
