3 Reasons Why Trying to Time the Market Is a 'Fool's Errand'

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  • Historically, those who buy-and-hold have fared better than those who attempt to time the market.
  • Timing the market involves "getting it right" twice: when exiting and reentering.
  • There are steps to take if you're anxious about what the market will do next.

None of us can see the future, but we can learn from the past.

None of us knows what's right around the corner, much less what the next six months or year will bring. That's part of what makes life so terrifying and so exhilarating.

Investing can be tough for those who need assurances that the market will always be smooth sailing. And it's those investors who are most likely to try to time the market -- to hit it at "just the right moment."

Here are three reasons that strategy is doomed to failure.

1. History has rewarded those who buy-and-hold

Most invest with the intention of letting their investment ride, expecting both highs and lows. That's primarily because these folks know that the stock market has gone up in more years than it's gone down.

Does timing the market occasionally net an investor money or save them from losses? Yes, but at what cost? Well, we actually know. Over the past 50 years, the S&P 500 has provided an average annualized return of 9.4%.

And if you look at what was going on at the time, that's a fairly remarkable return. Over the past 50 years, the U.S. has fought wars in Vietnam, Iraq, and Afghanistan. We watched one president leave office mid-term; experienced a terrorist attack; suffered through the deepest, longest recession in U.S. history; and shut down due to the COVID-19 pandemic.

While the market reacted to each historical events, it managed to rebound, producing surprising results. Those who rode it out are the ones who prospered.

2. Market timing has a dismal record

Plenty of research has gone into how well market timing might work. After all, if it's an effective way of investing, we all want to do it.

Here are a two samples of what researchers have found:

  • When the brokerage firm Charles Schwab studied market timing, it found that the cost of waiting for the "perfect moment" to invest costs investors more than they would have earned -- even if their timing had been perfect.
  • Merrill Lynch looked at model portfolios and found that over a 30-year period, market-timed portfolios routinely underperform.

3. Nostradamus, we are not

Very few of us can predict short-term market movements accurately enough to beat the buy-and-hold strategy. We're not great about spotting declines before they hit, and we rarely know precisely when the market is set to rebound.

In order to work, market timing means you have to get it right two times: while exiting and reentering the market.

Steps to take if you're anxious

Some of us are more anxious than others, and the thought of losing money makes us want to pull a blanket over our heads and stay in bed for a week or two. The good news is that there are steps we can take to quell our fears.

  1. If you're nearing retirement or you're already enjoying your retirement years, build up a large enough emergency savings account to cover basic expenses for two years. You may find that having cash put away for those rainy days provides peace of mind.
  2. If you're terrified of a major downturn in the stock market, talk to your broker about boosting your allocation of bonds. Bonds are currently enjoying a day in the sun, so it may be the right time to focus there.
  3. If you're worried that you're going to miss the big market rebound when it hits, go slow. Gradually purchase stocks a little at a time. You may not time it perfectly, but as long as you're regularly investing in stocks, you'll be in a position to enjoy the rebound.

The fact that there are few guarantees in life is harder on some of us than others. But if you believe that timing the market is a better bet than the old buy-and-hold strategy, you're almost sure to be disappointed.

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