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Why You Shouldn't Time The Market

Buying low and selling high is the aim of the entire financial services industry, right? Yes. But that doesn't mean it's consistently possible. It just means a lot of people work really hard and spend a lot of money to convince you to try. Investors - you and me included - are subject to a lot of biases. We are affected by our emotional state, by quirks of personality, by the news of the day, and by various fallacies that can all lead to irrational decisions. If the market falls 2% in a day, should you buy? But what if it falls more tomorrow? If it reaches a new high, should you sell? What if it will keep going higher for another week? Shouldn't you try to figure it out? Remember, to successfully time the market you have to time it correctly twice: when to buy, and when to sell. In fact, to successfully beat a benchmark over the long term, you need to accurately time the market 74% of the time

The S&P500 returned 11.39% in 2014, (13.69% including dividends). The lowest close of the year - what would have been the time to buy to achieve the best possible return - occurred on February 3. Here's an example of the headlines from the middle of that day:

Not particularly encouraging. Sample quote: “Too much downside momentum and too little in the fear category to offer a safe entry point,” wrote a strategist (aka, a professional who tries to time the market). It certainly seemed like the selloff would continue. But you would have had to guess that this was in fact the low of the year, and this was the precise correct moment to buy, in order to time the market correctly.

The highest close of the year was reached on December 29. The headlines from that day were a snoozefest, typical of that late in the year, with light trading and no real news:

But again, an investor would have had to see through the inertia to recognize their exit point - the precise moment that they should sell.

So on top of the lack of clear direction indicating the best action to take, we also learn from our mistakes. We remember the regret of missing the Feb 3 low, and don't want to miss it again. We kick ourselves for not selling on December 29 when we should have. Those emotions will inform the next decisions we make, and will often lead us down the wrong path.

This is why so many investment managers and financial planners - me included - don't time the market, and strongly discourage clients from doing it either. It almost inevitably leads to a poor outcome over time, drives up costs from unnecessary transactions, and has been shown, over and over, to work against an investor's best interest.

None of us can see the future: not average investors, not professional investors, not the media. A lucky call once or twice is rarely repeatable over time. So instead of trying to do the impossible, go back to basics: appropriate asset allocation, low cost, diversified, passive funds, regular investments, and periodic rebalancing. You'll thank yourself in the long run.


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