Why I Don't Like Market Timing
The stock market is now in its 9th year of a bull run that started in March of 2009. Despite recent volatility, the S&P 500 is up over 13% in the last 12 months. Annualized returns over that time period are over 10% per year.
And for almost as long as the market has been on its upward trajectory, you've probably heard predictions that we are on the brink of another downturn. Yet at least for now, the market is holding steady.
The point is that no one knows exactly when that downturn will occur. We know there will be a downturn -- there's no denying that. But as to when it will happen? Well, that's a guessing game and a fool's errand to try to predict. You might hear people who have been predicting imminent downturns say they aren't wrong, they're just "early." The price of being early on a prediction is pretty high! If you missed out on the last 2 years, you sat on the sidelines while US markets returned 33% over that time period.
Market Timing Doesn't Work
It's perfectly normal to feel anxiety about what the stock market might do. Again, there's no shortage of people saying a crash is right around the corner! Of course, there are also always people saying "it's different this time" and predicting a new era of higher market returns. Neither one is right, of course. No one can predict what the market will do in the short term. Those who say they can are just speculating. Sometimes they'll get it right, but most of the time they'll get it wrong. Even a broken clock is right twice a day, right?
There's big a difference between feeling nervous and acting on your emotions and making bad decisions with your money. The problem with trying to time the market is that it can lead you to make the most common behavioral mistakes investors make -- buying high and selling low. And I can tell you with confidence that buying high/selling low is a sure way to sabotage your own chance at actually building wealth.
Investor Behavior Has a Bigger Impact Than Stock Market Declines
So you might be asking yourself, why does market timing and emotion-driven decision making lead to behavioral mistakes? Or perhaps you are thinking you are different and would never make such emotionally-drive decisions. Sometime market timing can absolutely work, but certainly not most of the time, and it's often driven much more by luck than skill. Again, no one has crystal ball and can see into the market future. If you consistently react to market ups and downs, you’ll perform worse on average than if you just stay the course and follow a long term, well-crafted investment plan. It's kind of like trying to pick the right lane in a giant traffic jam. I don't know about you, but usually by the time I move into the lane that looks like it was moving faster, it suddenly slows down and I realize I should have stayed in my original lane!
Let's run through an example of what many investors mistakenly do when their decisions aren't informed by a plan and strategy:
- An investor finally decides to invest their money in the stock market.
- At first, things are great! The market goes up and the investor feels good. They're making money and building wealth!
- They feel confident in their decision to invest and continue to invest each month as the market keeps going up. Easy, right?
- But eventually (inevitably), the market hits a rough patch. Now the investor starts seeing losses and gets anxious.
- The market goes even lower (and lower!), which suddenly feels downright scary. It hurts! The investor feels like they've lost money (and we humans are hardwired to avoid loss even more than we’re motivated to experience a gain).
- Now the emotions begin to take over -- namely panic, anxiety, uncertainty and fear.
- The emotion-driven investor decides to "cut their losses" and sells at a low price to get out of a sinking market, thus locking in their losses.
- That whole experience was a disaster, which means the investor doesn't want to put their money back in the market until they are sure it's going up again.
- Good luck hearing the "buy" signal among all the stock market noise!
- When they eventually dip their toe back in the market, prices have gone up, well above the market bottom when they sold.
- That's how it happens -- the investor rode a wave of emotion, leading directly to buying high and selling low.
Even if you think you can do better than what I just described, the evidence shows that most investors screw this up at some point. There's a better way!
Having a Long Term Investment Plan Means NOT Having to Time the Market
A long term investment plan means crafting a portfolio with the end in mind. A well-designed portfolio should be built specifically with your time horizon, risk tolerance and goals in mind. There's no reason to panic during short term market movements when your plan is for the long term. Your time horizon is everything here.
“Losses” are not realized until you sell. And if you sell when prices are low, there’s no chance for those unrealized losses to swing back to unrealized gains when the market trends upward once more.
Growing Your Wealth Means Investing Objectively For the Long Haul
I work with my clients to create a comprehensive financial plan that isn't simply about investments. A comprehensive financial plan allows my clients to:
- Balance financial resources to enjoy life today while still planning for the future
- Develop specific, actionable plans to achieve short term goals (if you need the money in the next few years, it has no place in the stock market)
- Develop specific, actionable plans to achieve longer term goals (those 5, 10 and 20+ years out)
- Look at all the options in order to make the best decision about how to use their money. The overriding factor in everything we do is to make sure they are using your resources in a way that allows you to create the life you really want to live.
You don't have to be rich already to work with a financial planner. In fact, I would argue that a good financial planner can add a lot more value to clients who aren't already rich -- families who are trying to prioritize and balance the many competing financial goals they have.
If you are ready to build your own financial plan and start working toward the life you want, reach out and schedule your free 30 minute Get Acquainted call.
When the next market downturn occurs — and we know it will (we just don't know when), you can have the peace of mind that comes from knowing you've got a plan in place. If you've got a long time horizon, there's plenty of time to ride out the market. It's all part of the plan.
When the stock market gets bumpy, look to your financial plan and consider the fact that the money invested won't be used for 5, 10, or even 20+ years. And that means market fluctuations, and your feelings that go along with them, will be completely forgotten a decade from now.
Growing wealth happens slowly -- it's a long-term process. Over decades of saving and investing, you will see the market swing back and forth. It’s how we react to those swings that makes all the difference.
No one likes seeing the market take a tumble and your account balances go down. But I remind myself that no one can reliably predict or time the market to avoid the downward swings. I also remind myself I’m investing for the long haul — and you should be, too.
Schedule a free call if you'd like to have a conversation about your plans, goals, and financial situation. Together, we can build a plan to make sure you’re on the right track to achieve what’s most important to you.
Disclaimer: This article is provided for general information and illustration purposes only. Nothing contained in the material constitutes tax advice, a recommendation for purchase or sale of any security, or investment advisory services. I encourage you to consult a financial planner, accountant, and/or legal counsel for advice specific to your situation. Reproduction of this material is prohibited without written permission from Alyssa Lum, and all rights are reserved. Read the full Disclaimer.