With all the market volatility of the past year, chances are you have either considered or actually attempted to time the market to avoid a loss. Perhaps you sold your positions early on and haven’t found the right time to jump back in, or maybe you’ve accumulated significant cash assets and you’re waiting for the perfect time to buy. While it can be tempting to try your hand at timing the market, the truth is it doesn’t actually work. Here are 3 reasons why and what you should do instead.
Market Timing Is Consistently Inconsistent
Timing the market usually involves attempting to “buy low and sell high” by analyzing current market trends for inefficiencies or volatility indicators. This strategy may work sometimes, but it is far from perfect. Not only do you have to guess when to buy in, but you then have to guess when to sell. That means for every gain, you have to be right twice to make timing the market worth it. Unfortunately, market bottoms can only be truly spotted in hindsight, and timing the market is often closer to playing the lottery than it is to an educated guess.
Timing the Market Is Expensive
Timing the market can also be expensive. Depending on your account type, asset class, and where you are executing your trades, you will likely be charged for every purchase and sale you make, and that’s on top of any taxes owed on gains. The more frequently you trade, the higher your transaction costs will be.
If you held the assets for less than a year, your gain will be taxed as ordinary income at your marginal tax rate, which can be as high as 37% for high-income earners. Long-term gains are taxed at a preferential rate. Regardless of your tax rate, your market timing must still be right more often than not just to cover the cost of your guess.
You Will Miss Out on Compound Growth & Market Rebounds
A recent study by Schwab Center for Financial Research found that bad market timing is worse than investing immediately, regardless of the market conditions at the time of investing. This indicates that even in market downturns, or just before a downturn, investors who invest immediately and remain invested will be better off than those who stay on the sidelines or attempt to time the market.
Take a look at Schwab’s graph below, which shows just how much more a fully invested portfolio earns over the course of 19 years. It would earn approximately $14,000 more in growth than a portfolio with bad market timing, and $91,000 more than a portfolio that stays in cash. The only investor who performs better is the one with perfect timing—but since we already know that perfect timing is impossible, investing immediately is the next best strategy.
What’s more, over time that extra $14,000 or $91,000 will have the opportunity to grow even more thanks to compounded interest. Even if the market fluctuates in the short term, the odds are high that a solid investment strategy will grow over time.
Another graph by Hartford Funds and Morningstar shows what happens if you miss the best days in the market, which often closely follow a major downturn and can be just as difficult to predict. An investor who missed the 10 best days in the market between 1992 and 2021 would have earned 54% less than someone who was fully invested during the same time period.
Someone who missed the 30 best market days would have earned a whopping $172,000 (83%) less than their fully invested counterpart. The research is based on a $10,000 initial investment, but these numbers would be much more dramatic if you were dealing with a $100,000 or even a $1,000,000 portfolio.
The time value of money tells us that a dollar today is worth more than a dollar tomorrow, and this is certainly the case when it comes to investing. The longer you are invested, the more likely you are to ride out the day-to-day market fluctuations and experience growth instead.
Are You Missing Out on Opportunities for Growth?
Don’t cheat yourself out of opportunities for growth by prematurely timing the market. At Center for Wealth Management, we take pride in helping our clients make the most out of their portfolios and feel confident in their long-term financial decisions. To learn more about how we can help you navigate market volatility and questions about market timing, schedule a free introductory meeting online, call (248) 220-4321, or email me at firstname.lastname@example.org.
Justin Williamson is a senior partner and co-owner of Center for Wealth Management, an independent, fee-based wealth management company in Troy, Michigan. Justin has been serving clients in the financial services industry since 2001. He spends his days helping his clients achieve their financial goals and make the best decisions for their families so they can spend time on what they love and experience financial peace of mind. Justin is known for his dedication, integrity, personal touch, and ability to simplify complex issues. Justin specializes in serving engineers and other professionals who are close to retirement or recently retired and helping them maximize their benefits and create a retirement plan they can rely on. He is a seasoned public speaker and presents at numerous corporate events each year on retirement planning, Medicare, Social Security, and other financial topics. Justin has a bachelor’s degree in Business Administration majoring in Personal Financial Planning from Central Michigan University and is a CERTIFIED FINANCIAL PLANNER™ practitioner.
Outside of work, Justin enjoys spending time with his family. He lost his wife of 18 years, Heather, to brain cancer in 2020. He and his son, Carter, and twin daughters, Jaden and Kelsey, work to honor her and make her proud each day. Outside of work, you can usually find him coaching baseball, softball, and basketball, and spending time at their family cabin at Higgins Lake. Learn more about Justin by connecting with him on LinkedIn.