iStock_000018683493_Small.jpg

Blog

Why Market Timing is a Losing Proposition

Have the recent ups and downs of the market made you consider getting out of the market completely? Maybe you’ve considered putting your hard-earned money in something less volatile, like CDs or a money market account. Even though it may not grow as quickly, you might be thinking, at least you won’t lose all your hard-earned savings, right?

If the economic uncertainty unfolding in the daily news has left you wondering – or worrying – about what’s coming next, you’re not alone. No matter how you feel about the U.S. entering into a trade war with China, it’s hard to deny that the prospect is causing considerable market turmoil. It’s painful to think that the money you’ve worked so hard for – and that you expect to sustain you in retirement – is at risk.

Over the past month or so, several of our clients at AMDG Financial have expressed concern, and our counsel is always the same. While we don’t know how the coming weeks and months will unfold, are you okay with gritting your teeth, and keeping your carefully structured portfolio on track as planned? (Unless, of course, new or different personal circumstances warrant revisiting your investments for reasons that have nothing to do with all the tea in China.)  

New call-to-action

This may not be the type of advice you want – or expect – to hear when you’re watching your account balances fluctuate on a regular basis. Instead, you may be wondering how to somehow shift your portfolio to higher ground, until the coast seems clear. In other words, might these stressful times justify a measure of market-timing?

Here are four important reminders on the perils of trying to time the market – at any time. It may offer brief relief, but market-timing ultimately runs counter to your best strategies for building durable, long-term wealth.

  1. Market-Timing Is Undependable. Granted, it’s almost certainly only a matter of time before we experience another recession. As such, it may periodically feel “obvious” that the next one is nearly here. But is it? It’s possible, but market history has shown us time and again that seemingly sure bets often end up being losing ones instead. Even as recently as year-end 2018, when markets dropped precipitously almost overnight, many investors wondered whether to expect nothing but trouble in 2019. As we now know, that particular downturn ended up being a brief stumble rather than a lasting fall. Had you gotten out then, you might still be sitting on the sidelines, wondering when to get back in. The same could be said for any market-timing trades you might be tempted to take today.
  2. Market-Timing Odds Are Against You. Market-timing is not only a stressful strategy, it’s more likely to hurt than help your long-term returns. That’s in part because “average” returns aren’t the near-term norm; volatility is. Over time and overall, markets have eventually gone up in alignment with the real wealth they generate. But they’ve almost always done so in frequent fits and starts, with some of the best returns immediately following some of the worst. If you try to avoid the downturns, you’re essentially betting against the strong likelihood that the markets will eventually continue to climb upward as they always have before. You’re betting against everything we know about expected market returns.
  3. Market-Timing Is Expensive. Whether or not a market-timing gambit plays out in your favor, trading costs real money. To add insult to injury, if you make sudden changes that aren’t part of your larger investment plan, the extra costs generate no extra expectation that the trades will be in your best interest. If you decide to get out of positions that have enjoyed extensive growth, the tax consequences in taxable accounts could also be financially ruinous.
  4. Market-Timing Is Guided by Instinct Over Evidence. As we’ve covered before, your brain excels at responding instantly – instinctively – to real or perceived threats. When market risks arise, these same basic survival instincts flood your brain with chemicals that induce you to take immediate fight-or-flight action. If the markets were an actual forest fire, you would be wise to heed these instincts. But for investors, the real threats occur when your behavioral biases cause your emotions to run ahead of your rational resolve.

We’d like to think one of the most important reasons to hire an adviser is to help you avoid just these sorts of market-timing perils – during just these sorts of tempting times. Even if you do everything “right” in theory, we still cannot guarantee your success. But we are confident that sticking with your existing plans represents your best odds in an uncertain world.

So, if you have your doubts, please let us know. It’s our job – not to mention our moral and fiduciary imperative – to offer you our best advice across all of the market’s moves. While market-timing may be illusory, we are here for you, ready to explore various real steps you can take to shore up your investment resolve, regardless of what lies ahead.

Click here to view previous news releases from AMDG Financial.

Subscribe to our blog!