Few words characterize today’s financial markets better than uncertainty.
When overseas economic issues rob investors of months of gains and speeches by Federal Reserve officials cause markets to flip-flop unpredictably, investors are left wondering what they should do.
In an attempt to make major market movements work for their portfolios rather than against them, some investors attempt to time the market.
But is timing the market even possible?
Let’s look at what marketing timing is, how your money biases affect your investment strategy, and how to stay focused on your end goal—building wealth that supports you and your family.
What Is Market Timing?
Have you ever sat at a familiar red traffic light and tried to time the “switch” to green as instantly as an experienced New York City cab diver?
If so—don’t worry, we won’t tell—you’ve caught a glimpse into the idea of timing the market.
This strategy attempts to predict future market movements to time buying and selling decisions. You’ve likely seen financial headlines or overheard breakroom discussions that epitomize this idea, like “sell before the market collapses” or “don’t sleep on this hot investment.”
Market timing takes the general idea of “buy low and sell high” to the next level by guessing when the market might dip or swell. When markets are rallying or pulling back, it can be tempting to react accordingly.
But impulse investment decisions can be as frustrating and fruitless as arguing with a toddler—their mood, like the market, can change in an instant.
The problem with these predictive strategies is that investors usually guess wrong. Think back to that red light. Did you ever jump the gun? If so, you could have put yourself in danger of a ticket or, even worse, an accident.
Plus, the time and energy it takes to actually find the perfect investment window often eclipses the benefit altogether. It could take years until you time the market perfectly, and the gain you experience from that one moment will likely be smaller than if you invested for the long haul.
A recent Bank of America study beautifully illustrates this point. This research analyzes data from all the way back from 1930 and found that if investors missed the 10 best days of the S&P 500 per decade, they would still gain 28%.
That’s pretty good.
But, if investors stayed in the markets throughout the ups and downs, they stood to see returns of over 17,000%.
As you can see, the cost of trying to time the market can severely impact your long-term returns.
Money Biases Play A Significant Role In Market Timing
As investors, we tend to have poor instincts when buying or selling investments.
Because our emotions get in the way.
By the time you feel comfortable investing in something, often that investment is near or at its peak. Conversely, many people run at the first sign (or prediction) of trouble.
Even though it’s challenging to experience, market corrections are a normal part of market cycles. In fact, they are more common than you might think. Market corrections, or a dip of more than 10% but less than 20%, occur roughly once every two years.
But just like a rainbow can come out of a storm, high-growth periods tend to follow significant pullbacks. If you sell as soon as the markets dip, you’ll likely miss out on some of the market’s best-performing days. Remember, if you’re not invested in the stock when it moves, you could miss out on the whole play.
Let’s get back to the idea that our emotions and opinions about money (aka money scripts) contribute to these actions. Money scripts represent our thoughts, attitudes, beliefs, and decisions toward money, and they reveal a lot of things, like whether you’re a spender or a saver or how comfortable you are with financial risk.
As you can probably see, emotions and investing don’t always work well together. When our emotions are in the driver’s seat, it can lead to decisions rooted in fear, anxiety, or carelessness.
By working with a professional, building strong financial strategies, and analyzing your money regularly, you can make emotions and investing work together. Here’s a great image to help bring this idea to life.
Yes, your advisor wants to help keep you from the big mistake you’re about to make!
Tips To Stay Invested for the Long-Haul
Understanding your money scripts and how they affect investment decisions is a great first step to a better relationship with investing, but it’s only the beginning. A strong investment strategy is all about planning for the long term.
An excellent way to start investing smarter is to practice dollar-cost averaging. This investment strategy involves spreading out stock or fund purchasing, buying at regular intervals, and investing similar amounts. Dollar-cost averaging essentially helps ensure that you don’t put all of your eggs in one basket.
Start by investing in small increments regularly, like contributions to your 401k. Setting up automatic investments is also a great way to control your money and remove the temptation of overspending. With dollar-cost averaging, you invest a certain amount each month, no matter what the market does at the moment, to reach your financial goals faster.
Speaking of financial goals, a wise investment strategy comprises clear, attainable goals. These will depend on your age, risk tolerance, risk capacity, and values. Some of the most common investment goals are based on retirement, schooling, life events, and lifestyle desires.
- Do you want to help put your kids through college?
- Are you still dreaming of that perfect house in a fantastic school district?
- Do you have a thoughtful strategy for charitable giving?
- When do you and your spouse want to retire?
When you have a strategic and deliberate investment strategy on your side, you won’t need to time the market.
Instead of focusing on market timing, concentrate on building a comprehensive risk management strategy with your financial advisor. Doing so balances your risk and your goals. You may have to answer questions like how much risk are you comfortable taking? How much do you need to take to reach your goals?
When you understand the risk you’re willing and not willing to take, you can set timely goals, better understand your relationship with risk, and diversify your portfolio appropriately.
Prioritize Time In The Market, Not Timing It.
Like timing the stoplight, it’s virtually impossible to consistently find the top or bottom of the market. Developing a personalized investment strategy and making prudent adjustments is a much better long-term strategy than making emotional investing decisions.
Does that mean that investors have to passively wait out every market (e.g., buy and hold), hoping that the next big decline doesn’t take out their life savings? Definitely not. There’s a significant difference between trying to time markets and making strategic shifts to try and avoid considerable market declines.
Extensive research, training, and experience have taught us that successful investing requires discipline and the patient execution of a long-term strategy, especially when it’s emotionally cumbersome. In fact, that is usually the time when opportunities are greatest, like how the darkest part of the night is right before the sun rises.
We understand that market timing has a tempting simplicity—buy low and sell high.
However, it’s pretty hard to predict the tops and bottoms of markets correctly, and most investors get it wrong. Remember, you don’t have to be the first to the party or the last to leave to have fun; often, just being there when it matters is enough to help you achieve your financial goals.
If you want to create a smarter investment strategy that works for you, our team at Chladek Wealth can craft a portfolio that’s unique to you. Get in touch with our team today to get started.
The contents of this article are for general information and educational purposes and should not be construed as specific investment, financial planning, tax, accounting, or legal advice. Please consult with a professional advisor before taking any action based on the contents of this article.
All investment and financial planning strategies involve risk of loss that you should be prepared to bear. We cannot guarantee any investment performance whatsoever, and past performance is not indicative of potential future returns.
Updated May, 2022
Originally posted August, 2016