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The Trouble with Market Timing

15 May

The Trouble with Market Timing

The Trouble with Marketing Timing

Difficult at Best

We’ve all heard the old adage, “buy low and sell high.” While a seemingly sensible strategy, timing the buying and selling of investments to coincide with the market highs and lows is, we believe, difficult if not impossible.

Why? One reason is because successful market timing requires that an investor make two decisions correctly: when to get out of the markets, and when to get back in. Unfortunately, most investors are not very good at timing these decisions. In fact, even professional money managers struggle to make successful market timing decisions on a consistent basis, often resulting in their underperformance relative to an appropriate benchmark index.

The Unintentional Effects of Emotion

Typically driven by the emotions of fear and greed, many investors will enthusiastically buy stocks during periods of strong market performance, and sell when the market declines.* Unfortunately, such emotional decision-making often results in buying high and selling low, potentially hindering the chances of reaching one’s goals.

The Likely Consequences of Missing the Best Days

Whether an intentional investment strategy or an emotion-driven behavior, market timing will undoubtedly result in times when the investor is either partially, or completely, out of the markets. Time and again, however, significant gains have occurred suddenly, and over a relatively short period of time. Unfortunately, those who are on the sidelines waiting for the “right time” to get back in may end up missing some of the market’s best days, often to the detriment of their portfolios’ long term growth potential.

A Better Path to Follow

We believe a better path to follow is to create a financial plan based on your goals, time horizon and risk tolerance, and then implement that plan using low-cost, tax efficient investment strategies. By staying focused on the long term while practicing a disciplined, buy and hold approach to investing, we believe investors will be better positioned to capture the returns that the markets provide, while also increasing their chances of reaching their goals.