What Happens When You Fail at Market Timing
Missing Good Market Days will Harm Your Portfolio
The impact of missing just a few of the market’s best days can be profound, as this look at a hypothetical investment in the stocks that make up the S&P 500 Index shows. A hypothetical $1,000 turns into $138,908 from 1970 through the end of August 2019. Miss the S&P 500’s five best days and that’s $90,171. Miss the 25 best days and the return dwindles to $32,763. There’s no proven way to time the market—targeting the best days or moving to the sidelines to avoid the worst—so history argues for staying put through good times and bad. Investing for the long term helps to ensure that you’re in the position to capture what the market has to offer.
So Don't Sell Off Your Investments
If you want a fun look at what happens if you do try to time the market, check out Bob, the World's Worst Market Timer. It's the story of a hypothetical investor who only ever invested at the peak of the markets, right before a crash. But - and this is the key - he also never sold after the crashes. Selling is the one worst mistake an investor can make, because if you miss the highest performing days, your returns will suffer outrageously. The folks at A Wealth of Common Sense leave us with the following lessons from Bob’s journey:
- If you are going to make investment mistakes, make sure you are biased towards optimism and not pessimism. Long-term thinking has been rewarded in the past and unless you think the world or innovation is coming to an end it should be rewarded in the future. As Winston Churchill once said, “I am an optimist. It does not seem too much use being anything else.”
- Losses are part of the deal when investing in stocks. How you react to those losses is one of the biggest determinants of your investment performance.
- Saving more, thinking long-term and allowing compound interest to work in your favor are your biggest accelerants for building wealth. These factors have nothing to do with picking stocks or a complex investment strategy. Get these big things right and any disciplined investment strategy should do the trick.
No, Really, Don't Sell
And if you're still not convinced, consider the futility of market timing. This hypothetical case looks at the world's best market timer - someone who chooses the exact best day of the year to invest, every year, over 30 years. In the end, they have $156k in their portfolio from all their perfect timing.
This "best investor" is then compared with the "worst investor" possible - someone who chooses the exact WORST day of the year to invest. How much worse will the terrible timer be off? Will they have lost money? Well, actually, they still end up with $122k.
"...the difference between the perfect idiot and the man with perfect foresight, is the idiot has nearly 80% of the nest egg as the impossibly accurate market-timer. So, not only can you not pick the perfect day to invest, there isn’t even a whole lot of upside from trying!"
Don't Try to Time the Market
The moral of this story: Don't bother trying to time the market. Even if you get everything perfectly right, it won't make that much of a difference. And the worst possible outcomes will arise from trying to time the market by SELLING, because the huge market rebounds are where returns are made. Many of our clients called us back in December of 2018, when the market was tanking. Many of them wanted to sell, and we talked them out of it. Because sometimes it's scary to stay in the market when things are looking bad, but it's actually much riskier to get out. Anyone who sold off their investments in December missed out on the best January returns in 30 years.
Investing can be intimidating, and you need a cool head when market declines happen - because they will decline at some point. If you don't have the control to stay in the market when things get shaky, hire someone who can guide you through those scary times. I'll leave you with three quotes about market timing from some of the smartest investors in history:
“You get recessions, you have stock market declines. If you don’t understand that’s going to happen, then you’re not ready, you won’t do well in the markets.”
- Peter Lynch
“The idea that a bell rings to signal when to get into or out of the stock market is simply not credible. After nearly fifty years in this business, I don’t know anybody who has done it successfully and consistently. I don’t even know anybody who knows anybody who has.”
- Jack Bogle
“The stock market is a device to transfer money from the impatient to the patient.”
- Warren Buffett
How To Invest Instead
One thing should be clear by now - we are not market timers. We're not going to day-trade stocks to try to beat the markets by an extra fraction of a percent. Our investments are low-cost index funds with no hidden fees. Because we think investing should be like watching paint dry: predictable and boring (but with beautiful results!) And while your money is busy making more of itself, you're out making more of your life.