Why Market Timing Doesn’t Work

Earlier this year, the market volatility following the “Liberation Day” announcements sent the market down by 11% in only two trading days.

In a wave of panic, a self-managed consulting client of ours sold their entire portfolio, only to remain on the sidelines until mid-summer.

The outcome was a harsh lesson.

They missed the market's rapid rebound, resulting in an estimated $240,000 in permanently lost portfolio value.

And if this was an anomaly, I wouldn’t want to write about it.

Unfortunately, it’s all too common.

Over the years, I spoke with many clients that have experienced very similar outcomes by letting their emotions be in the driver’s seat.

These client experiences, and the thousands of hard-earned dollars they missed out on, beg the question every investor needs to ask…

Is there a better strategy than trying to time the market?

The Data

Research consistently shows that missing just the 10 best trading days over a 20-year period can cut your total returns in half (!).

Less than 10 mistakes in 20 years? That’s a steep challenge for the average DIY investor!

Please keep in mind that for market timing to work, you must be right twice: when to sell and when to buy back in.

Please also know that frequently, the best days for the market happen immediately following the largest market drops.

This is precisely when fear is highest and most investors are exiting.

And I see this behavioral trap all the time!

So what should you do instead?

Ditch the timing and make a plan!

How is this for a novel idea?

But it does work and helps you grow your wealth even in times of market turbulence.

Establish and Maintain Your Targets

Create a clear and comfortable target asset allocation that is based on your specific cash needs (like 70% stocks and 30% bonds, for example).

If you are in retirement or close to it, establish how much you will need from your portfolio to maintain your lifestyle.

As an example, if you need $50,000 per year, I would usually recommend maintaining between $350,000 to $500,000 in liquid investments such as bonds.

Over time, as you continue to rebalance, your total amount in bonds may increase.

This would give you some “dry powder,” which is how I like to refer to it, to take advantage of the markets.

There are, of course, other methods such as creating a Fortress Financial Plan, but that’s a different topic.

Be Prepared to Buy (Strategically)

Once you know how much you need from your portfolio to maintain your lifestyle, any “excess” reserves or “dry powder” can be used to your advantage.

Instead of selling on the way down, you want to be prepared to buy.

It doesn’t mean that you must buy when the markets are down, you just want to be in a position to do so when the opportunity presents itself.

For a broad signal, consider evaluating your bargain hunting options when the markets are down by 10% or more.

This is what Wall Street calls a “market correction.”

Consider Trimming at the Highs

Just as panic selling frequently leads to costly mistakes, so does being subject to the FOMO (Fear Of Missing Out) phenomenon during a high-flying bull market.

Given where we are in the markets today, it’s hard to deny that at least some investors are feeling the pressure of FOMO thinking!

Go back to the basics.

If you are comfortable with a certain investment mix and your returns are keeping you on track to achieve your goals, do you really need to stretch and capture the next dollar?

As those of you who have been investing for a while know, the markets tend to go down much more rapidly than they go up.

What does this mean for you?

You cannot time the market.

And this applies in both directions.

Please be especially careful when you know that you are making emotional decisions.

This rarely leads to positive long-term outcomes.

You need to have a solid plan and the right mentality to follow it in times of market turbulence and euphoria.

As always, this is not investment advice. The information I’m sharing here is purely for educational purposes. Please do your own due diligence or talk to your advisor to determine what will be best for your situation.