Dangers of Market Timing

Investors who attempt to time the stock market run the risk of missing periods of exceptional returns. This practice may have a negative effect on a sound long-term investment strategy.

As shown below, we can see the returns for a hypothetical $1 investment in stocks, stocks minus the best 13 months (5% of the total time period), and Treasury bills. An unsuccessful market timer, missing the best 13 months of stock returns, would have earned a return similar to that of Treasury bills. How would an investor know, in advance, when one of the 13 months is about to happen? According to Warren Buffett, “The stock market is a device to transfer money from the impatient to the patient.”

There are more important aspects of investing that will determine your long-term success such as; Understanding the purpose or potential use for the funds, your investment time horizon and risk tolerance, the allocations to stocks, bonds and cash, the specific asset classes chosen and, finally, the particular investments that are selected. Although successful market timing may improve portfolio performance, it is very difficult to time the market consistently. You have to be right twice each time-when to sell and when to buy again. The only way to guarantee that you capture 100% of the return of the stock market is to be invested 100% of the time.