Why market timing doesn’t work

The successful long-term investor who stays the course, works a plan, and continues to invest is progressing closer to their goals today.  As painful as it feels to sit still and not flinch when markets contract, the patient investor practices discipline and is rewarded overtime.  This same discipline applies to sticking to their plan as companies rapidly increase in value too.  These investors are not alone, often receiving guidance and knowledge from a trusted financial professional who joins them on their journey.

Another group of investors, acting alone, move in an opposite direction.  Claiming to have insight and knowledge of what’s happening next, they sell their investments to cash when markets contract.  They feel more declines are on the horizon and would rather wait for a better day to invest.  What exactly does better timing look like?  I wonder if these investors have a clear picture around what it will take to buy back in before they liquidate in the first place?  I don’t believe they do as fear and uncertainty get inside their head as they go it alone.  Even as companies expand in value this group tends to hold back waiting for another decline.  They believe it’s different this time and rationalize fear in different ways.

Investors are certainly entitled to their own opinions but not to their own facts.  Historically, over long periods of time, holding diverse equities (companies of all sizes) for the long run will generate growth and profits.  Company values will increase and decrease and increase again as this year is no exception.  Good companies are getting stronger in difficult years such as 2020.  As an optimist, you own equities because you believe companies will generate profits.  These profits arrive in the form of both price appreciation and dividends over the years.  Attempting to own equities on your own terms by moving in and out of the market will only generate taxes, missed opportunities, and frustration.

What the long-term successful investor realizes is the market makes permanent advances with temporary contractions along the way.  Investors recognize life will be more expensive tomorrow and the best hedge to address this is the ownership of a diverse equity portfolio guided by a goal-based plan.  There is a price to pay in owning this portfolio, it comes in the form of accepting volatility.  Companies cannot continue their growth without their values shrinking periodically.  There is no way to consistently bypass volatility and still reach your financial goals.  Those who time the market completely miss this point.  Volatility is consistent and unpredictable, there is no way to avoid it and simply invest when times are good.  You must endure through the declines.

Timing the market means you must get it right twice, when you sell and when you buy back in.  It simply cannot be repeated with success, although many investors have tried.  So why sell in the first place?

I believe some investors are so focused on outcomes that they will do whatever is possible to create gains in their portfolio.  They view their investments in simple terms of gains and losses.  The main objective, the only objective is to increase gains.  The more the better.  That is not realistic if you understand volatility and know that even great companies will struggle as they expand overtime.  There must be a better approach then market timing and focusing your efforts on outcomes, right?

There is and it requires creating a detailed inventory of what you own and owe.  Only then may you proceed to invest the right monies in the right account.  Liquidity is key, often neglected by the market timer who consistently switches between cash and equities.  What they miss again is that it’s not one or the other but rather a combination of both cash and equities that allows a goal-based plan work.  It’s necessary to have cash reserves for opportunities and short-term purchases.  Equities of course will allow your plan to grow and flourish overtime.  Constructing a plan with the assistance of a financial professional will allow you to gain clarity around how much cash and how much equities are necessary for you.

Without a plan and planner, investors may believe outcomes are the only thing that matters with regards to their investments.  Yes, rates of return are important and do influence outcomes.  But more importantly then returns is the behavior of the investor and their temperament with regards to their investments.  Having a good temperament is the key to becoming a successfully long-term investor.  This allows you to avoid market timing and to work your plan.  More on what it takes to become a successful investor may be read here.

Have a question or want a second opinion on your financial decision making?  Reach out to us below as we’d be happy to chat with you.

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