The Costs of Market Timing: Why Doing Less Is Often Better : Capital Edge Insurance & Financial Services | Roseville, CA

The Costs of Market Timing: Why Doing Less Is Often Better

No one enjoys watching their 401(k) account balances decrease month after month during a market decline. And it can be hard to stay the course with a balanced portfolio allocation of 60% stocks and 40% bonds when markets surge and we hear friends talk about how they have doubled their savings by investing all their money in the latest hot stock. It can be tempting to try to buy high and sell low to take advantage of market swings.

Warren Buffett, a highly successful investor, understood this temptation. He once said, “The stock market is a device for transferring money from the impatient to the patient.” Although being patient in investing can be emotionally challenging and at times downright frustrating, patience is a trait that almost all successful investors share, and it’s essential for long-term investing success.

Attempting to buy low and sell high, also known as market timing, is a recipe for investment disappointment. There are three critical reasons those who do it usually regret the decision:

1. If your timing is even off a little, it can cost you big. We all wish we had the gift of foresight—being able to sell our stocks right at a high price before a major downturn and then buy them back for less at the start of a recovery. Unfortunately, no one has a financial crystal ball. Even if you were lucky enough to predict trends, mis-timing your purchases and sales by just a few days could make the difference between reaching your investment goals and falling short of them.

As the following chart from Fidelity illustrates, missing just the five best days of market performance over a 40-year investment period would have reduced your portfolio return by 38%. Missing the 30 best days would have slashed your return by 84%.1

Missing Out on the Best Days Can Be Costly

Hypothetical growth of $10,000 invested in the S&P 500 Index from January 1, 1980, to August 31, 2020

$952,512 Invested all days
$590,571 Missing best 5 days
$425,369 Missing best 10 days
$154,184 Missing best 30 days
$68,033 Missing best 50 days

Chart Source: “6 Tips to Navigate Volatile Markets,” Fidelity Viewpoints, August 2020.

2.) Emotions drive us to buy high and sell low. It is human nature to let emotions cloud judgment. In fact, an entire field of study, known as behavioral finance, is dedicated to understanding why people tend to make bad decisions when it comes to money.

We are instinctively drawn to new trends, a trait that appears to be partly hardwired into our DNA and partly driven by our fear of missing out; psychologists call this herding bias. We also tend to consistently overestimate our individual abilities and the likelihood of positive things happening to us; this is known as overconfidence bias. This reliance on feelings and instincts rather than on evidence and facts is the opposite of rational behavior—and you need to behave rationally if you’re going to make good financial decisions.

3.) Technology is NOT your trading friend. Thirty years ago, you could read an investment idea in the Wall Street Journal in the morning, call your stockbroker after lunch to place a trade, and still have an information advantage over other investors. Today, that is no longer the case for even the savviest individual investors.

With instantaneous electronic trading driven by sophisticated algorithms that analyze thousands of data points in a fraction of a second, it is impossible to keep up or compete with large institutional investors and hedge fund managers, no matter how experienced or knowledgeable you may be.

Why Boring May Be Better

Studies have shown that when a market downturn hits, it is easier for investors to hold on to unexciting investments, like broad index funds, than to stick with more volatile stocks or other holdings. These so-called boring portfolios tend to prevent you from making rash, ill-timed decisions. They can also keep your trading costs and fees lower because they help reduce the frequency of buying and selling.

Dollar-cost averaging is another proven strategy that offers a greater likelihood of long-term investment success than trying to time the market. With dollar-cost averaging, you systematically and consistently add to your investment portfolio every month, similar to the way pre-tax dollars are contributed to a 401(k) each pay period.

Dollar-cost averaging is a sustainable approach for all market conditions, but it’s especially useful during market downturns. Why? Assume that every month you add $500 to your investment portfolio to buy an S&P 500 index fund. If the market is soaring this month, you can buy 10 shares at $50 a share. If the market drops 25% next month, your $500 will buy 13.3 shares at the reduced share price of $37.50. Essentially, any time the market undergoes a correction, your monthly investments are taking advantage of the reduced prices to accumulate more shares before the next upcycle.

Tune Out the Noise

Having accurate and timely information is critical to making sound financial decisions. However, it’s easy to get caught up in what is going on in the markets. Financial news networks inundate us with 24/7 market predictions and investment recommendations—almost always delivered by either euphoric or panicked “experts.” During times of economic uncertainty, it can be enough to push anyone over the edge.

The simple truth is that no amount of data is going to provide you with a crystal ball to forecast the day-to-day movements of financial markets. Your best course of action is to rely on the human advice and guidance from a trusted advisor as well as on the core tenets of sound investing: diversification, asset allocation, and thoughtful risk management. Then let the power of time and historical market growth do their work.

Key Takeaways

Trying to time the market is a surefire route to investment frustration. If you had been on the sidelines for just five key days over the past 40 years, your portfolio would be worth 38% less.

Our emotions and the current speed of technology are working against us when we try to outmaneuver other investors.

The best course of action is using tried-and-true principles of sound investing—diversification, asset allocation, and risk management—combined with a commitment to dollar-cost averaging.

1 “6 Tips to Navigate Volatile Markets.” Fidelity Viewpoints. August 2020.

Eagle Strategies LLC (Eagle) is an SEC-registered investment adviser. Registration with the SEC does not imply a certain level of skill or training. Eagle investment adviser representatives (IARs) act solely in their capacity as insurance agents of New York Life, its affiliates, or other unaffiliated insurance carriers when recommending insurance products and as registered representatives when recommending securities through NYLIFE Securities LLC (member FINRA/SIPC), an affiliated registered broker-dealer and licensed insurance agency. Eagle Strategies LLC and NYLIFE Securities LLC are New York Life Companies. Investment products are not guaranteed and may lose value. No tax or legal advice is provided by Eagle, its IARs or its affiliates.
Lynzie Wolters, ChFC® RICP® is a Registered Representative offering securities through NYLIFE Securities LLC, Member FINRA/SIPC, a Licensed Insurance Agency, and a Financial Adviser offering investment advisory services through Eagle Strategies. Lynzie Wolters, ChFC® RICP® is also an agent licensed to sell insurance through New York Life Insurance Company and may be licensed to sell insurance through various other independent unaffiliated insurance companies.
Capital Edge Insurance & Financial Services, not owned and operated by NYLIFE Securities LLC, Eagle Strategies LLC and its affiliates. This information was produced by Eagle Strategies LLC and is being provided by Capital Edge Insurance & Financial Services as a courtesy.
Lynzie Wolters CA Insurance License Number 0I20911


Subscribe to our Newsletter