To invest successfully over a lifetime does not require a stratospheric IQ, unusual business insights, or insider information. What’s needed is a sound intellectual framework for making decisions and the ability to keep emotions from corroding that framework.

                                                                                                                - Benjamin Graham (Warren Buffet's Mentor)

 

Timing the market is a futile exercise. Market timing is generally the result of panicked investors making emotional decisions. As you can see from chart below, not being invested in the market for some of the best days of the year can cost you dearly. The chart shows a hypothetical investor investing $10,000 on January 1, 1980 until July 2018. Had this investor remained invested during the entire period they would have grown their investment from $10,000 to $708,143. However, if they missed only the 5 best days of the market during that term they would have grown their investment to only $458,476, a difference of $249,667, or 35% less.

The chart highlights the differential of missing out on the best 5, 10, 30, and 50 trading days between January 1, 1980 and July 2018. As you can see, the results are significant.

 

For the average investor, in most instances, making emotional investing decisions means panicking when the market is sliding and headlines are alarming. It is not unusual for clients to make impulsive fear-driven decisions to withdraw money from the markets during times of heightened alarm thereby making them a “market timer”.

Once a panicked decision has been made, two long-term investment decisions have been made which are likely to significantly reduce returns over your lifetime. 1. You have immediately impeded the magic of compounding, as previously written about and 2. You have attempted to time the market.  

In trying to time the market, you have now sold off your investments most likely near the market bottom or after a short-period of very bad returns. The challenge becomes when to reinvest in the market. Over the last 10 years, 6 of the 10 best trading days occurred within one week of the 10 worst days. Essentially, the time you are most likely to make a bad emotional decision is exactly the time when you need to remain invested. As the data shows, missing those best days can have significant consequences on long term returns.  

The way to prevent market timing is by having an asset allocation (For more details see - Own Your Future -Owner Not a Loaner) that will allow you and your family to achieve your life goals. Once you have that allocation, staying out of your own way and in the market is the best thing you can do to achieve your goals.

 

For further reading, click here to Own Your Future or click here to contact any member of of our team.