Monthly Archives: June 2016

The Impact of Market Timing

There are people out there, professional money managers and individual investors, who feel that the market can be beat by timing when you buy and sell. People put a lot of time and money into elaborate models and technical analysis to identify when to get in and out of the market. I equate this to a gambler who says he has “a system” to beat Las Vegas, and as we know, the only real winners in Las Vegas are the casinos. Sure you can have a string of good luck, but the problem with a little success is that you think you’re invincible, and then you start taking bigger risks. This is how the casinos get their money back and then some.

Would it surprise you that you probably have a better chance of winning the lottery than you do of consistently beating the market through Market Timing? To better illustrate the effect of market timing (see table below), take a look at what happens if you aren’t successful at timing when to get in and when to get out of the market. Over the past 25 years through 2014, a $10,000 investment in the S&P 500 would have grown to $130,831 or 10.4% annually. If you missed just the best 10 days, your investment would be worth half as much at $65,292 or 7.5% annually. And if that doesn’t open your eyes, if you missed the best 30 days over this same period, your $10,000 original investment would be worth $26,877 or an annualized return of 3.9%.

cost-of-being-out-of-the-mkt-1989-thru-2014As I mentioned above, one of the  investment approaches associated with market timing is something called Technical Analysis.  The investment approach, which has a long list of followers, is focused on looking at trading patterns in the price of a stock, bond, commodity, etc. to determine/forecast what trend will impact future price movements.  When it comes to a companies fundamentals (e.g., earnings, cash flow, debt, etc.), no attention is paid by technical analyst to determine fair value.  If you’re thinking that trying to look at a historical price chart to determine the short-term future sounds like smoke and mirrors, you’d be right.  More importantly, the ability of technical analyst to consistently outperform the market is basically non-existent.  

The point I’m trying to make is don’t gamble against the market. If you do, you’ll end up on the short end of the stick. You don’t have to be a hero to save and invest for retirement; you just need to be consistent and believe in the process of the long-term benefits of staying invested and the power of compounding your returns to a bigger nest egg.

Just remember, if there was someone who could time the market consistently, everyone would be lining up to throw money their way. Since none of us are doing that, it’s a safe assumption that the person who can consistently time the market doesn’t exist. So don’t think you’re that one person who “has a system” who can make all your dreams come true. Just remember, “What is gambled in Vegas usually stays in Vegas.”