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Featured 10.11.2018

Find out about the potential risks of market timing versus a buy-and-hold investment strategy.

Focus on Time in the Market, Not Market Timing

Market timing is an investing strategy in which the investor tries to identify the best times to be in the market and when to get out. A big risk of market timing is missing out on the best-performing market cycles; missing even a few months can substantially affect portfolio earnings. Moreover, guessing the market’s timing is not easy, and even many professional money managers have misjudged significantly.

For individual investors, a better alternative over the long run may be a buy-and-hold strategy. But a buy-and-hold strategy should still include regular portfolio checkups and balancing as necessary.

Sports commentators often predict the big winners at the start of a season, only to see their forecasts fade away as their chosen teams lose. Similarly, market timers often try to predict big wins in the investment markets, only to be disappointed by the reality of unexpected turns in performance. It’s true that market timing sometimes can appear to be beneficial. But for those who do not wish to subject their money to such a potentially risky strategy, time — not timing — could be the best alternative.

What Is Market Timing?

Market timing is an investing strategy in which the investor tries to identify the best times to be in the market and when to get out. Proponents maintain that successfully forecasting the ebbs and flows of the market can result in higher returns than other strategies. Critics, however, note that changes in a market trend can appear suddenly and almost randomly, making the risk of misjudgment significant.

Market Timing Has Its Cost

One of the biggest costs of market timing is being out when the market unexpectedly surges upward, potentially missing some of the best-performing moments. For example, an investor, believing the market would go down, sells off equities and places the money in more conservative investments. While the money is out of stocks, the market instead enjoys a high-performing period. The investor has, therefore, incorrectly timed the market and missed those top months.

The opposite of market timing is buying and holding as the market goes through its cycles. This table illustrates the potential results from poor market timing compared with buying and holding.

The Risk of Missing Out

1987-2016 1997-2016 2007-2016
[1] Untouched $18,234 $4,394 $1,957
[2] Miss 10 Top-Performing Months $7,007 $1,865 $902
[3] Miss 20 Top-Performing Months $3,299 $951 $551

Perhaps the most significant risk of market timing is missing out on the market’s best-performing cycles. The three columns represent the growth of a $1,000 investment beginning in 1987, 1997, and 2007, and ending December 31, 2016.

Row 1 shows the investment if left untouched for the entire period shown above; Row 2 shows the investment if it was pulled out during the 10 top-performing months; and Row 3 shows the investment if it was pulled out during the 20 top-performing months.

Source: ChartSource®, DST Systems, Inc. Stocks are represented by Standard & Poor’s Composite Index of 500 Stocks, an unmanaged index that is generally considered representative of the U.S. stock market. It is not possible to invest directly in an index. Past performance is not a guarantee of future results. © 2017, DST Systems, Inc. Reproduction in whole or in part prohibited, except by permission. All rights reserved.
Not responsible for any errors or omissions. (CS000078)
Past performance is no guarantee of future results.

Regular Evaluations Are Necessary

Buy and hold, however, doesn’t mean ignoring your investments. Remember to give your portfolio regular checkups, as your investment needs will change over time. An annual review can help ensure that the investments you select are in keeping with your goals and time horizon.

Time Is Your Ally

Clearly, time can be a better ally than timing. The best approach to your portfolio is to arm yourself with all the necessary information, and then take your questions to a financial advisor to help you with the final decision making. Above all, remember that both your long- and short-term investment decisions should be based on your financial needs and your ability to accept the risks that go along with each investment. Your financial advisor can help you determine which investments are right for you.

Photo by nic on Unsplash
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