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The Myth of "Market Timing"

The Myth of "Market Timing"

June 07, 2022

It's common when the market goes down for some investors to feel that they should've "gotten out" ahead of the downturn.  That somehow, they could've avoided this and that they (or their advisor) should've seen it coming. 

This is simply not true, and nobody is able to time the market with consistent accuracy.  While some investors may get lucky with this tactic once or twice, studies have shown that that investors who attempt to time the market have to be perfect 100% of the time to benefit long-term.  In fact, market timing is actually a strategy that is more likely to harm your portfolio than help it!  Many studies have been done that show this to be true and I'll summarize a few for you:

Putnam did a study showing an investment of $10,000 performance from 2006 to 2021.  They compared holding that investment over the entire period (which included the 2007 crash) vs. missing out on the best days in the market.  Their findings?  Even missing only 10 of the best days in the market reduced the portfolio's performance by over 50%!!!1

One might argue, "Well, what if we miss the 10 WORST days of the market?  Won't we have significant gains?"

A study similar to Putnam's was done by the American Association of Individual Investors of a $10,000 investment over the period of 2000 - 2019.  That study found that missing out on the WORST 10 days of the market only gave about 4% more gain than simply staying invested!2  The risk of missing the best days far outweighs the reward of missing the worst.

Additionally, the worst and best days of the market are typically very close together, sometimes only days apart!  The best days also often occur during bear markets or recessions, when fearful investors are most inclined to go to cash.3  Assuming that you will be able to choose the right time to get out and then have the courage to get back in ahead of the comeback (while it's still down) is unrealistic.  For most investors, staying the course during market downturns is the best plan of action.

The deception of market timing lies is the belief that if one has the right information, they can outsmart the stock market - and that the stock market is predictable and controllable when it is not.  The truth is, NOBODY can predict when the worst and/or best days of the market are going to be, and in order for market timing to work, you have to get both right.  You have to get out before the downturn and in ahead of the comeback.  Without a crystal ball, this is impossible.  The better tactic is to invest in companies that are fundamentally healthy, diversify your portfolio to mitigate risk, and realize that market downturns are a normal (typically short-lived) part of investing.  Historically, the market has always trended up long-term, even if there are temporary setbacks.  The longer you are in the market, the more likely you are to experience gains:5

1 Year Hold Periods = 73% Positive Returns

3 Year Hold Periods = 83% Positive Returns

5 Year Hold Periods = 87% Positive Returns

10 Year Hold Periods = 94% Positive Returns

In fact, there is no 20 year period in the history of the stock market where you will find an average loss!  So in conclusion, the most important thing to remember is that time in market, not market timing is most important!

In case you missed it, we recently hosted a webinar where we discussed the Dangers of Trying to Time the Market - you can catch a quick clip on YouTube below: 


1 Time, not timing, is the best way to capitalize on stock market gains.  February 2022.

2 Missing the Best and Worst Days of the Market.  American Association of Individual Investors Los Angeles. December 31, 2018.

3 The Perils of Trying to Time Volatile Markets.  Wells Fargo.  September 28, 2021.

4 S&P 500 Index - 90 Year Historical Chart. Macro Trends.  June 6, 2022.

5 Time, Not Timing is What Matters.  American Funds Capital Group.  Publication date not available.