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Why Market Timing Does Not Work

Few words characterize today’s financial markets. Uncertainty would be one. When overseas economic issues rob investors of months of gains and speeches, Federal Reserve officials cause markets to flip-flop unpredictably. Investors are then left to wonder what they should do. In an attempt to make major market movements work for their portfolios, some investors attempt to time the market.

Market timing is the strategy of trying to predict future market movements to time buying and selling decisions. When markets are rallying or pulling back, it can be very tempting to try to seek out the top to sell, or the bottom to buy. The problem is, investors usually guess wrong and miss out on the best market days. Can the cost of trying to time the market make a big difference in your returns? You bet it can.

Missing out on the market’s top-performing days can be costly. This chart illustrates how a hypothetical $10,000 investment in the S&P 500 could have been affected, had they missed the best days during the 20-year period between January 1, 1995 and December 31, 2014.

Source: Standard & Poor’s and Wealth Management Systems. Example based on the hypothetical performance of a $10,000 investment between 1/1/1995 and 12/31/2014. Return represented by total return of the S&P 500, an unmanaged index generally considered to be representative of the U.S. stock market. Past performance is not a guarantee of future results. This is a hypothetical example used for illustrative purposes only and excludes important factors like transaction costs and management fees. You cannot invest directly in an index.

This is a simple example, excluding some important elements like transaction costs, but it serves as a useful illustration of our point. Investors who remained invested for the entire period could have seen their investment increase to $64,752, and those who missed just the five top days would have accumulated just $42,972. Investors who missed out on the best 30 days would have seen just a 1.46% return throughout the entire period, which is much less than they could have received on a 20-year Treasury Bond.[1]

Why would this have happened? Because they tried to time the market.

The average investor misses out on performance, in part, because their money tends to come in near the top and come out at the bottom. Investors are notoriously bad at picking the right time to enter or exit, and by the time they feel it is the right time to invest, many times those investments are at or near its peak. Corrections are a normal part of market cycles, and periods of high growth often occur very close to major pullbacks. Investors who sell during the bad times frequently miss out on the best days of performance. If you’re not in the stock when it moves, you may miss out on the whole play.

The bottom line is: it’s virtually impossible to accurately find the top or bottom of the market consistently. Our experience shows that time in the market is more important than timing the market. Developing a personalized investment strategy and making prudent adjustments when conditions warrant, is a much better long-term strategy than making emotional investing decisions. Does that mean that investors have to passively wait out every market, hoping that the next big decline doesn’t take out their life savings? Definitely not.

There’s a big difference between trying to time markets and making strategic shifts to try to avoid major market declines. One of the benefits of active management is rather than relying on a single strategy, investors can tap into the experience of multiple money managers who employ different market strategies. Active managers rely on analytical research, economic forecasts, and the human elements of experience and intuition to make critical investment decisions. Now, that’s not to say even the best managers don’t have bad years. Whatever investment strategy you choose, it’s impossible to perfectly predict future market movements.

Conclusions

Research and long periods of experience have taught us that successful investing requires discipline and patience to execute a long-term strategy, especially when it is emotionally difficult. In fact, that is usually the time when opportunities are greatest. We understand market timing has a tempting simplicity to it: buy low and sell high. However, it’s pretty hard to correctly predict the tops and bottoms of markets and most investors get it wrong. Remember, you often don’t have to be the first to the party or the last to leave to have fun. Just being there when it matters is enough to help you achieve your financial goals.

If you have any questions about the information we’ve presented or want to know how recent economic events may affect your investments, please let us know. We would be happy to discuss your concerns.

 

 

Footnotes, disclosures, and sources:

These are the views of Platinum Advisor Marketing Strategies, LLC, and not necessarily those of the named representative, Broker dealer or Investment Advisor, and should not be construed as investment advice. Neither the named representative nor the named Broker dealer or Investment Advisor gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. Please consult your financial advisor for further information.

We have not independently verified the information available through the following links. The links are provided to you as a matter of interest. We make no claim as to their accuracy or reliability.

Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.

Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values.

Past performance does not guarantee future results.

The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general.

You cannot invest directly in an index.

Consult your financial professional before making any investment decision.

[1] http://fc.standardandpoors.com/sites/client/generic/axa/axa4/Article.vm?topic=5991&siteContent=8096, http://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yieldYear&year=1995

#1348975 DOFU 11/2015

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