The Perils of Market Timing

Thursday marked the 8th anniversary of the current bull market.  On March 9, 2009, the stock market reached its crisis-era lows following the burst of the housing bubble and the market has since delivered one of the longest and most profitable stretches of gains on record.  Over the past 8 years, the S&P 500 Index, which tracks large US companies, has increased almost 250 percent!  With stock market indexes continuing to scratch record highs on a near-weekly basis over the past few months, investors are beginning to grow more and more cautious that the next market pullback, drawdown or even crash is imminent.  After all, our recency bias alone reminds us of the market crashes in 2001 and 2008 and tells us it’s about time for another one.


It certainly doesn’t take an advanced market technician or Wall Street historian to understand that market prices have been rising at an unsustainable pace.  At some point, stock market gains will run out of steam and we’ll see some type of market correction.  This current bull market won’t last forever.  The problem, however, is that determining the timing and extent of this correction is almost impossible.  Literally no one has any idea.  Media reports calling this the “market top” grow louder by the day and investors begin to question the approach of their current savings and investment strategy. 

During these times, it’s tempting for investors to sell their investments, realize their gains and wait for the next correction to get back into the market.  Other investors might simply continue to build up cash reserves rather than investing their savings while waiting on the sidelines for lower market valuations.  Given current market levels, there’s certainly value in exploring rebalancing options or creating cash for near-term expected withdrawals from the investment portfolio.  Generally, though, trying to time the market with your investment decisions is a bad idea. 

To efficiently time the market, you need to be right twice – selling at the top of the market and getting back in at the bottom of the market.  Rarely can anyone predict either event.  Getting them both right is near impossible.  Even more difficult is timing the market consistently over long periods of time.  Investors that start saving in their 20’s and live into their 80’s have market exposure for more than 60 years.  During that stretch, investors will experience bull markets, bear markets, sideways markets and countless types of sudden events that jolt the markets either direction.  Trying to steer through these swings with market timing techniques is likely to prove counterproductive over the long term.  Investors that try to time the market might get some decisions right, will probably get more decisions wrong and over the course of time will have been better off simply staying invested or maintaining their savings and investment process.  Historical data clearly shows that staying invested and following a consistent strategy produces larger returns over time than letting current events or market valuations drive investment approach. 

This chart from JP Morgan shows the effect of missing the market’s best days over 20 years on an investment portfolio.  As the chart illustrates, missing just the 10 best days over a 20-year period lowers the return by more than 3 percent!  No one knows when these “best” days will occur and they often transpire close to the “down” days market timers attempt to avoid. 

There’s an old saying that “time in the market” not “timing the market” is what produces investment returns over time.  When investors grow cautious amidst a lengthy bull market, they need to focus on their time horizons, risk tolerance and short-term needs from the portfolio.  For long-term investors, volatility is the price of admission for the benefit of investment returns over time.  Trying to predict this volatility is dangerous and doing so will likely hurt performance over time.