Is Market Timing a Myth?

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Q: What does market timing and stock picking have in common with Las Vegas?

A: You might win – but odds are most likely stacked against you. And if you attempt to win at both every year, it’s nearly guaranteed you will end up losing overall.

One difference between the two is that with market timing and stock picking, you are betting big chunks of your net worth. And you’re not even getting free drinks. It also bears remembering that what happens in the market doesn’t just stay in the markets. Those events are hitting you where it counts: your future.

The trouble with market timing is that in order to win, you must correctly predict market cycles. How do you know when to sell an asset class? You don’t have a crystal ball, so you can’t possibly know the correct answer. Do you sell now? Next week? Next month?

Let’s say you do end up correctly guessing when to sell. You’re still only halfway there because you now have to figure out when to get back in. For example, if the market drops 600 points in a day, is that when you will dive back in? Or will you wait for a full month of terrible returns? And if you do, and then buy back in and the market continues to fall, will you bail again?

If you do happen to successfully time both sides of the market – which, again, is a rare occurrence indeed – it’s not necessarily a given that you will have made any money. After all, if your gains are relatively modest, then the cost of trading in and out of the market may eat up most of your profits.

Time in the Market vs. Timing the Market

Take for example a story of three friends: Laurie, Angela and Karen are old college friends who began investing in 1987, each with $100,000.

Karen has invested her $100,000 in four installments, each one timed at the top of a bull market. She waits until the market is “good” before investing and she never sells.

Angela is great at recognizing the bottom of a bear market, and has also invested her $100,000 in four installments – each one made right at a market bottom.

Laurie never pays much attention to what the market does on any given day. She invested her $100,000 in one lump sum and hasn’t done anything with it since.

Laurie got into the market of the fall of 1987, right before the “Black Monday” crash, which meant her portfolio’s value was cut by more than 30% in her first few months, leaving her far “behind” her two friends. But when the three of them looked at the larger, long-term picture, it was a different story. Laurie – who never watched or timed anything – is now well ahead of her friends.

Market Return Source: CBOE daily; S&P 500® (SPXSM) Price Return 8/25/1987 to 5/31/1988, and S&P 500®. Total Return (SPXTR) inclusive of dividend reinvestment 6/1/1988 to 12/31/2015. Note: 1% flat annualized return used for uninvested cash in the above hypothetical scenario. This example is fictional and does not depict any actual person or event.

The moral of the story? Invest assets in the market as soon as you are able. Yes, there will be ups and downs, but as long as the world economy continues to improve living standards, investors will be rewarded with compounding growth on their investments. Even supernatural timing of market bottoms doesn’t beat time in the market.

Our Take

Staying focused on a long-term plan with clear goals is the best way to navigate what can sometimes be an emotional roller coaster. The market is, after all, rarely driven by just one factor – that’s why it’s so hard to time the ups and downs. Investors with a strategic plan can feel more confident about their finances and don’t have to worry about outguessing factors beyond their control.

To learn more about protecting your financial future in today’s market, read our free Personal Capital Investor’s Guide to Volatile Markets.

Download Guide

Disclaimer: This communication and all data are for informational purposes only and do not constitute a recommendation to buy or sell securities. You should not rely on this information as the primary basis of your investment, financial, or tax planning decisions. You should consult your legal or tax professional regarding your specific situation. Third party data is obtained from sources believed to be reliable. However, PCAC cannot guarantee that data’s currency, accuracy, timeliness, completeness or fitness for any particular purpose. Certain sections of this commentary may contain forward-looking statements that are based on our reasonable expectations, estimate, projections and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not a guarantee of future return, nor is it necessarily indicative of future performance. Keep in mind investing involves risk. The value of your investment will fluctuate over time and you may gain or lose money.

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Craig Birk, CFP®

Craig Birk, CFP®

Craig Birk leads the Personal Capital Advisors Investment Committee and serves as the Chief Investment Officer. His focus is translating improvements in technology into better financial lives. Craig has been widely quoted in the Wall Street Journal, Bloomberg, CNN Money, the Washington Post and elsewhere. Prior to Personal Capital Advisors, he was a leader within the portfolio management team at Fisher Investments, helping assets under management grow from $1.5 billion to over $40 billion. Craig graduated from the University of California at San Diego and has earned the Certified Financial Planner® designation.

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