Trying to time the market? Don’t.
By David Haggard, CFA®, CFP
I’m an avid but average golfer, so I can remember in detail that sunny afternoon years ago when I went birdie-hole in one-par on the front nine. I can recall every shot in that stretch, the sound of the ball plunking into the cup on each hole, the cheers of my golf partners. Even today, when I play, I am tempted to try and duplicate that triumph.
That attempt to duplicate success is harmless on the golf course, but downright risky in the stock, bond, real estate or other parts of the global capital markets. It’s called “timing the market.” It is what day traders do on home computers after watching business news on cable. It’s closer to gambling than it is to investing.
And it’s a bad idea. It springs from a very human reaction to conclude, “If I did it once I can do it again.” Sure, you can flip a coin and have it come up heads 10 times in a row. Yet it might take you 10 years before you can do it again. If you’re betting that you can do it every time, you’re going to lose a lot of money between successes.
The lesson of the coin flip should be simple: It’s not possible to consistently –– time and time again –– make the right move at the right time. That kind of thinking leaves no room for error, and as any seasoned investor knows, investing is filled with errors.
Why do people think they can beat the odds? For one thing, doing so sounds logical, especially when cable TV broadcasters are touting the stock du jour by interviewing a celebrity hedge fund manager who won big on a recent move. Viewers start to salivate: “I wasn’t a part of that play, but I could have been.” What the show doesn’t highlight are the funds and individuals that didn’t strike gold with that stock. The one success gets airtime; the 99 failures don’t.
Never ignore the role fear and greed play whenever money is on the table. If people fear they will miss out on an opportunity to score, they will act with a sense of urgency driven by greed, which will raise its ugly head with even the most sophisticated investors.
What’s the price people pay for this? It’s called compounding. If you’re in and out of the markets on a whim, you’re bound to miss days of high performance when the market could be helping you. Those misses are costly. For example, according to Putnam Retail Management, if you had invested $10,000 in the S&P 500 on Dec. 31, 2005, by the end of 2020 your investment would have been worth $41,100. But if you had missed the 10 best days during those 15 years, your portfolio would have been reduced to $18,829. If you had missed the 20 best days, your stake would have dropped to $11,400.
For most investors, the strategy should be to steadily preserve what you’ve earned and patiently build wealth over time. The problem comes when people try to force money to get bigger exponentially by timing the market. The goal should be to beat inflation and fund what’s needed for college tuitions, long-term healthcare, and retirement.
That’s investing. Everything else is gambling.
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