Here's What Happens When You Try to Time the Market
KEY POINTS
- When you time the market, you try to buy investments at a low or sell at a high.
- Studies have shown that timing the market doesn't work, so you may be better off investing on a preset schedule and holding your assets for many years.
Your goal as an investor is to make money -- clearly. And to that end, it helps to buy stocks when their share price is down and sell stocks when their share price is much higher. But if you focus on trying to time the market, you might end up missing out on prime wealth-building opportunities.
What is timing the market?
Timing the market means trying to time your investments to when the stock market is at its best or worst. That generally means trying to add stocks to your brokerage account when their price is at a low, and then trying to sell your shares when their value has peaked.
Timing the market might seem like something that makes sense at first. There's just one problem: Even seasoned investors tend to be really bad at it. In fact, through the years, countless studies have shown that timing the market just plain doesn't work.
What happens when you try to time the market?
When you try to time the market, you often miss out on opportunities to load up on quality investments at a good price -- even if it's not the best price. Here's an example.
Let's say you're looking to buy shares of a given company that are trading for $90 apiece. You might track that stock continuously to get in at the right time.
Those shares might drop down to $70, and you might pass on the opportunity to buy them thinking they'll go even lower. Only if those shares then climb back up to $90 apiece, you'll have missed out on the chance to scoop them up at a discount.
This is a pretty simplified example. The point, however, is that if you try to buy investments at a low -- whether you're doing so for individual companies or broad market ETFs -- you might end up missing out on opportunities instead.
And you should also be careful when it comes to selling stocks at a high. Say you bought shares of a given company at $40 apiece and their value shoots up to $80. You might rush to sell so you can basically double your money. But holding those stocks another few years might make it so that they're eventually worth $120. That's a much sweeter profit to enjoy.
Invest consistently instead
You may be someone who knows a lot about investing and is willing to track the stock market day in, day out. But even so, timing the market is generally not recommended by financial experts.
In fact, Schwab says, "Our research shows that the cost of waiting for the perfect moment to invest typically exceeds the benefit of even perfect timing. And because timing the market perfectly is nearly impossible, the best strategy for most of us is not to try to market-time at all."
So what investing approach should you take? One strategy is to simply invest as soon as extra money comes your way. The sooner you put your money to work, the more wealth you have the potential to build -- even if you're not buying a given stock at a low.
Now, this doesn't mean you should throw money at a given stock regardless of its price when you have a one-time windfall to invest with. But you also shouldn't necessarily wait for a given stock's price to drop to its absolute lowest point. So instead of asking yourself, "Is this really the low?," ask yourself, "Is this stock likely to go higher?" If the answer is yes, that means it's probably a good time to buy it.
Another strategy worth considering in the long term is dollar-cost averaging. What you do here is commit to buying certain investments at preset intervals, regardless of their price.
Many people who try to time the market end up disappointed. So rather than stress yourself out to follow their lead, invest steadily and consistently, and aim to hold your investments for a long time so you can maximize your profits.
Our Research Expert
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