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Why Market Timing Does Not Work

 

Keith Todhunter-SchaafsmaFew words characterize today’s financial markets like uncertainty. When overseas economic issues can rob investors of months of gains and speeches by Federal Reserve officials cause markets to flip-flop unpredictably, investors are left wondering what they should do. In an attempt to make major market movements work for their portfolios rather than against, some investors attempt to time the market.

Market timing is the strategy of trying to predict future market movements to time buying and selling decisions. When markets are rallying or pulling back, it can be very tempting to try to seek out the top to sell or the bottom to buy. The problem is that investors usually guess wrong, missing out on the best market days. Can the cost of trying to time the market make a big difference in your returns? You bet it can.

This chart illustrates how a hypothetical $10,000 investment in the S&P 500 could have been affected by missing the best days during the 20-year period between Jan. 1, 1995, and Dec. 31, 2014.

Investors are notoriously bad at picking the right time to enter or exit investments; by the time most investors feel the time is right to invest, the investment is at or near its peak. Corrections are a normal part of market cycles and periods of high growth often occur very close to major pullbacks. If you’re not in the market when it moves, you may miss out on the whole play.

It’s virtually impossible to accurately find the top or bottom of the market consistently. Our experience shows that time in the market is more important than timing the market. Developing a personalized investment strategy and making prudent adjustments when conditions warrant is a much better long-term strategy than making emotional investing decisions.

There’s a big difference between trying to time markets and making strategic shifts to try to avoid major market declines. One of the benefits of active management is that, rather than relying on a single strategy, investors can tap into the experience of multiple money managers who employ different market strategies. Now, that’s not to say that even the best managers don’t have bad years.

Research and long experience have taught us that successful investing requires discipline and the patient execution of a long-term strategy, especially when it is emotionally difficult; in fact, that is usually the time when opportunities are greatest. We understand that market timing has a tempting simplicity to it – buy low and sell high. However, it’s pretty hard to correctly predict the tops and bottoms of markets and most investors get it wrong. FBN

 

Keith Todhunter Schaafsma, MBA, Certified Financial Planner, is the Senior Investment Adviser at Ascendant Financial Solutions. She has been creating peace for her clients from financial chaos for more than 20 years. She and her husband Pieter, an artist, love to travel and enjoy the wide open spaces of the Southwest with their two cherished dogs.

 

Securities offered through Geneos Wealth Management, Inc. Member FINRA/SIPC. Advisory services offered through Ascendant Financial Solutions and Geneos Wealth Management, Inc.

 

All investing and investment strategies involve risk including the possible loss of principal. Investment strategies cannot ensure a profit or protect against loss in a declining market.

All investing and investment strategies involve risk including the possible loss of principal. Investment strategies cannot ensure a profit or protect against loss in a declining market.

All investing and investment strategies involve risk including the possible loss of principal. InvestAll investing and investment strategies involve risk including the possible loss of principal. Investment strategies cannot ensure a profit or protect against loss in a declining market. All investing and investment strategies involve risk including the possible loss of principal. Investment strategies cannot ensure a profit or protect against loss in a declining market.

 

Investment strategies cannot ensure a profit or protect against loss in a declining market.

By Keith Schaafsma, MBA, CFPÓ

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One Response to Why Market Timing Does Not Work

  1. Pete Nikolai February 10, 2016 at 5:57 AM #

    Two issues:
    1) Merriam-Webster defines plagiarism as “to steal and pass off (the ideas or words of another) as one’s own : use (another’s production) without crediting the source” Your credibility is tainted when you use the same words and ideas as others but do not cite a single source.
    2) What would an investor’s return be if they missed the worst days during the same period of the chart? Tell both sides of the story.

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