You've probably heard stories before from family members or friends who timed the market exactly. Either they sold out of an investment just before a crash or bought a stock just before it experienced exponential growth.
Making these perfect market timing moves feels great, but while it does happen, it may not be common. And if you have money that you invest, you may be better off keeping it invested for the long term rather than trying to time the market for these three reasons.
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1. It's time-consuming
Timing the stock market can be time-intensive. From day to day, there can be significant swings in trading prices. For example, on March 16, 2020, the difference between the high price of the day and the low price in the S&P 500 was 325 points -- almost a 12% swing. If you had intentions of selling at a high and you missed this one day or even hours of this one day, you could've missed your mark.
There are also days where you may think that stocks will end up trading lower than they started, but they reverse course throughout the day and end up higher than they started. And if this is the case, you may have ended up selling your investments at a lower price than you intended.
Changes in momentum can happen for a number of reasons, like investor sentiment changing or a particular industry unexpectedly being hit hard. You may spend countless hours studying the stock market for clues that a crash or correction is coming. And while there may be signs that it's pending, figuring out exactly when it will happen may be impossible even if you have your eyes glued to the screen all day.
2. It could cost you money
Missing just a few days could dramatically affect how much your money grows -- and depending on how many of them you miss, it could affect how well you meet goals like saving for retirement. For example, if you had $10,000 fully invested in the stock market between Jan. 2, 2001, and Dec. 31, 2020, you would've earned an average rate of return of about 7.5% per year, and your money would've grown to more than $42,000. If you missed just 10 of the best days of market performance, your return would've been reduced to 3.4% per year on average, and you'd have less than half as much money saved.
The more days you miss, the more pronounced these losses become. If you missed 20 of the best days, your average annual return would be slightly positive at 0.7% and you'd have less than $11,500. And if you missed 40 of the best days, you would've entered negative territory with a -3.4% return on average and ended up with less than half as much as you started with. That's why time in the market and staying fully invested may be a better strategy than guessing which days you should be buying your investments and which days you should be selling them.
3. It's incredibly hard
Over a five-year period of time, more than three-quarters of large-cap funds underperformed the S&P 500. These money managers spend all day working on finding opportunities that will help give them an edge. The reward reaped for doing so could entice investors into their funds, but even with this benefit, the majority of them don't.
While it's possible that you'll fall into the category of the ones who sometimes do, how often will you get it right? And how much higher will your average rate of return be? It's no easy task, and if these experts have a hard time, it's completely normal that you would too.
Trading can be fun, but putting too much pressure on yourself could take away from this experience. And the fear of getting it wrong could even cause inaction on your part. Instead of spending all of your time and energy trying to beat the market, investing the core part of your money into an index fund, an ETF, or a portfolio of stocks that you plan on holding for a long time can help you keep pace with the stock market and meet your objectives. And if there is a part of you that loves trading, you can actively trade with a small portion of your money.
