The concept of Timing the Market

The concept of market timing is very seductive. After all, who wouldn’t want to be in the market during the good times and out of the market during the down times? Market timing is just like a crapshoot. Sure, you may get lucky and wind up gaining more than you anticipated. Or, perhaps, you happened to buy into a stock just before it skyrocketed. But how often does that happen? More importantly, what happens when you don’t time the market well?

The key to successful investing isn’t timing the market; it’s time in the market. Investing and staying invested is a long-term way to build your future. Even when the market is down, or going through some turbulent times, it’s better to stay invested than to sell and try to buy later. Especially when faced with short-term market corrections, getting out of the market may prove to be more devastating than sticking it out.

During a bear market, my clients will call and ask my opinion about when I think the market will start to come back. Unfortunately, the fact remains that no one is able to predict what the market is going to do. This leads many people to try and time the market. I also get calls from clients asking me to sell all their equities and put them into a cash position. They say that they will then reinvest when the market starts to come back. What they don’t realize is that by the time they think the market is “on its way back up,” they have already missed out on 10–20 percent in growth. By selling during a down market, you turn paper losses into actual losses.

Recently, when the market started to go down dramatically, I had a client call and want to liquidate his entire portfolio. He was upset that the market had continued to slide and that he was losing money. He was also concerned because he was taking monthly income out of his investments, which impacted the account values, as well. His overall portfolio was valued at more than one million dollars when we had this conversation. Although he didn’t come out and say it, he was scared about losing his money, and wanted to protect himself against any further losses. He wanted to me to sell everything and put it into a cash account. At that time, the money market funds were offering interest rates of about four percent.

I talked with my client, trying to reassure him and convince him that liquidating the entire position was a very unwise idea. Even with all the reasons I presented to him, he was still very upset and firm that he wanted everything in a cash account. One thing that helped me convince him not to cash everything in was his wife. Although she was terrified, as he was, that they were going to lose their money, she knew that by selling everything they would turn their paper losses into actual losses. Together, she and I convinced my client not to liquidate everything. We agreed to move a portion of the money into a money market fund, and that he would draw his monthly income from there, rather than from another account. Even though this wasn’t what he truly felt he wanted, he was comfortable with this. And I was glad that he agreed not to sell everything. I was able to talk him down from moving all his money to moving about 10 percent. Later, as the market continued to decline, he and his wife came in for an appointment. We discussed being invested in the market versus keeping the money in a money market fund. When we initially moved the money, the money market account was earning about 4 percent; when we met for our appointment, it was closer to 3.25 percent. Since my client was taking out nearly 7 percent annually, we knew we had to change something. At that rate he was guaranteed to lose almost 4 percent per year.

We discussed moving his money back into the market. At first, he was a little resistant, but he knew that he had better reinvest, rather than try to time the market. I explained that by holding out until he felt the market was coming back, he was really doing himself a disservice because he was putting himself in the position of missing out on potential growth. During that meeting, we reinvested his money in the stock market.

I know that it sounds like that really isn’t the case; that by taking his money out and then reinvesting it he was doing better.

When it comes to timing the market, history has proven that it doesn’t work. Investors willing to stick out the short term declines have been rewarded with large gains over the long run. In fact, missing just a few days, even during booming markets, can drastically impact the return on your portfolio. Unfortunately, many investors have been sucked in by this type of get-rich-quick form of investing. Because of their actions, there have been some wild days on the market, as prices go up and down.