Here's the Problem With Market Timing

Avoiding market timing is a lesson that many investors haven't learned yet. It's just rather impossible to know what the market will do from year to year:

In 1995, the market (as measured by the S&P 500) advanced a whopping 37.5%. Many people might have assumed that given the market's long-term average annual gain of around 10%, the next year would likely be a downer.

But as it turned out, 1996 was a big winner, too. And if you bet against the market in 1997, you lost again -- it advanced 33%. Those were heady years. Many predicted that we were surely due for a crash. Yet in 1998 and 1999, the market just kept going up. It was only in 2000, 2001, and 2002 that the market fell, by 9%, 12%, and 22%, respectively. Look at the chart below and you'll see how far most years are from the average of roughly 10%.

Year

S&P Return

1995

38%

1996

23%

1997

33%

1998

29%

1999

21%

2000

(9%)

2001

(12%)

2002

(22%)

2003

29%

2004

11%

2005

5%

2006

16%

2007

5%

2008*

(41%)

*As of Oct. 27, 2008.

Days, too
Days are even more unpredictable than years. On Monday, Sept. 29, 2008, the Dow dropped 778 points, the biggest single-day drop recorded at the time -- representing a loss of about 7% of its value. By mid-October, it had fallen an additional 21%! Many investors bailed out along the way (which you can probably guess, by the fact that the stock market dropped so much).

If they did, though, they missed Oct. 13's record-breaking gain of more than 900 points -- an 11% whopper of a day. There has been more volatility since the 13th, but those who were out of the market on the 13th lost out. We just can't know much about the short term, which is why it's best to invest for the long haul, with money we won't need for at least five years.

So ...
You can offset some volatility with dividend-paying companies, as they can help you sleep at night and can save you from some massive losses. Here are a few you might want to research further:

Company

Recent dividend yield

Wells Fargo (NYSE: WFC  )

4.3%

AT&T (NYSE: T  )

6.3%

Nokia (NYSE: NOK  )

5.2%

Capital One Financial (NYSE: COF  )

4.2%

Bank of N.Y. Mellon (NYSE: BK  )

3.3%

EnCana (NYSE: ECA  )

3.7%

T. Rowe Price (Nasdaq: TROW  )

3.1%

Source: Yahoo! Finance.

As tempting as it can be, don't try to time the market. The short run is just too unpredictable.

Longtime Fool contributor Selena Maranjian does not own shares of any companies mentioned in this article. Nokia is a Motley Fool Inside Value recommendation. Try the Fool's investing newsletters free for 30 days. We're beating the market, and you can, too. The Motley Fool is Fools writing for Fools.


Read/Post Comments (7) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 28, 2008, at 12:48 PM, SteveTheInvestor wrote:

    I agree with the emphasis on dividend stocks. They tend to be a bit more stable. I also agree that knowing which way the market will go is rather close to impossible. However, I think it is appropriate to go ahead and acknowledge when things are out of control (like from last year to present day) and reduce exposure to stocks. Some might call that market timing. I call it being reasonable and prudent.

    The "stocks are on sale" pitch only goes so far. Those who bought when stocks began their "on sale" decline are down big and will likely spend a lot of time just trying to recover. What a waste.

  • Report this Comment On October 28, 2008, at 3:18 PM, wuff3t wrote:

    "Those who bought when stocks began their "on sale" decline are down big and will likely spend a lot of time just trying to recover. What a waste."

    Yes, but the point is that if you sell now and try to time the market you will likely miss out on the huge gains on the way back up.

  • Report this Comment On October 28, 2008, at 3:46 PM, OctoberAmy wrote:

    "If they did, though, they missed Oct. 13's record-breaking gain of more than 900 points -- an 11% whopper of a day."

    I can't agree with that logic. At the moment I write this, the Dow's down below where it started on that 900 point up day. 900 points up and back down, so what?

    You bet I bailed out on September 29....I could smell the panic after the house voted "NO". Then I bought back in again at Dow=8000-something in the following weeks. You can do what you want with your money, but reader beware all the buy-n-hold lectures, you don't have to catch all the up days, you just have to miss a few of the worst down days. It goes down way faster than it goes up.

  • Report this Comment On October 29, 2008, at 1:42 PM, 181736065 wrote:

    Here's the simple fact:

    Because of the current compilation of "perfect storm" troubles (world-wide recession, massive asset deflation in housing and commodities, US consumer and national fiscal lopsidedness, banking troubles, increasing layoffs with soon to be defaults in car and credit card loans and - what appears to be a new "bubble" in the US Dollar)....

    There is no reason to be long in stocks.

    Te RISK in the markets today still outweighs any potential short term rewards.

    Also, the point that you will miss big days of upsides shows that the authors knowledge of bear market history is wanting. Large, dramatic upsides often occur during long term bear markets.

    PS Does anyone, besides me, see a "Bubble" brewing in the US Dollar? Could that be the next "crash?"

  • Report this Comment On October 29, 2008, at 3:53 PM, eightzeroes wrote:

    I've heard this crap from my broker who treats my money like a 11-year old treats Monopoly money. I finally did the math and figured things out for myself - I'm better off for it.

    I pulled most of my money out Nov 07, against the advice of my brokers. If I had left it in, I would have lost 40-50% of my worth. The 11% rally doesn't mean much when compared to that kind of loss. So I'm happy to sit it out with my nest egg.

    It's easy to write, "Wow, the market is up 11%!" but that doesn't translate across the board to every investor. Talking about market gains is not the same as talking about portfolio gains. Some portfolios are full of stinkers like Ford, WAMU, Sprint, etc...

    And what if you were in the European markets as my broker advised me to be in? Good luck.

    The author is right that most investors don't understand the timing of the market - BUT - what she fails to point out is that it is possible to understand.

    And chew on this -when you lose money, you need a higher gain to realize it back. If you lose 50% you need about a 75% gain to recapture the lost funds. (That's off the top of my head, do the math.)

    Imagine you had 100K. Would you rather sit on it at 5% and put it back in after a year or two - or would you like to ride it down to 59K and then hope you can recover it in 2-3 years or longer? The answer is a no brainer in my book.

    ( fe3lixallen - good question, which takes the topic to a whole 'nother level.)

  • Report this Comment On October 29, 2008, at 4:50 PM, nooars wrote:

    If you start the year with 100 grand and over the course of the year you lose 50% that leaves you with 50 grand.Keep in there and the next year you get a 50% return on your 50 grand and u have 75 grand.Yes?????????So unless my math is fuzzy every dollar that u lose it takes 2 to get even.SI????Funny that she picks 95 when the market got manipulated and we had the bull rush i mean run.Whatever happened to the NASDAQ the stockmarket of the future?If you look at long term charts of the SnP 100 it did not make it back to the highs of 2000.Did that not tell u something was wrong?Does the divergence of GE and MMM from the SnP in 05 blast warning signals.The top in the bank index january 07 whisper in the wind?The market last 2 years was led by commodity stocks that equal inflation.Think before 05 every time oil went up the market would shudder.But then the tape heads kept quiet.There was nothing else to lead the market so let it be oil.6 weeks before crude topped oil stocks topped.Does this add up to any thing that smells like skunk?Investors please stay calm while the rich get out.Does anybody think this selling was 401k money?Wall street always comes back so they say.If the market drops 1000 points and then 5 months gets back that 1000 does that mean you are even or is just the market even.So we solved the subprime mess.Thats right give them fixed rates.No that does not do it.They would not get a mortgage except for no income verification loans.That is the mess created by bubba clinton and down the road there will be another wave of foreclosures.This will not stop here.The trend is your friend.When the market goes up the tapeheads scream that mantra.But my friends the trend is down.The oracle himself says buy now.Yet all this time warren buffet did not have a personal dime in the market.While the suckers lost he sat on the sidleines.He bet billions against the dollar in 03-05 and won.This is just the rich clipping our wings once again.The yen is being driven up and this will make it difficult for japan to sell its goods and it will flounder.Once more its banks are under seige.We have not even seen the tip of the asian crisis till the chinese start laying off its nuveau rich middle class.Boy will they pissed they have to go back to the slums.Some things never change.My local bank used to have CNBC on its screen not anymore.As the mob used to say its time hit the matress.Just some ramblings form the middle class

  • Report this Comment On November 04, 2008, at 6:27 AM, Way2Risky wrote:

    eightzeroes - well done! It will be years before the LTBH's catch up to you.

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