Hi everyone, thank you for coming back to my blog. I hope you found my last blog interesting and useful, where I covered ‘An Important Introduction To Shareholder Advocacy’.
In this blog, I’m going to cover why attempting to time the market is a bad idea and what potential returns you could lose out on if you do stick to a short-term investing strategy instead of a long-term one.
It’s every investor’s dream to time the market. Ph.D.’s in finance and mathematics toil away at market simulations. However, no one has ever developed a system of timing the market that proved to be successful. The variables involved are too complex, and the impact of human-driven factors is too high.
Avoid listening to the financial pundits that claim today is a great day or a bad day to get into or out of the market. If they were consistently correct, they wouldn’t bother telling you. Instead, they’d be off adding to their billions.
Consider these reasons, why not to time the market next time you are thinking of doing so:
1. Anyone that could accurately predict short-term changes in the market would find themselves amongst the richest people in the world.
There are plenty of wealthy investors, but few of them got that way by predicting short-term changes in the market.
· There are wealthy investors that became wealthy by taking long-term positions.
· Hedge fund managers and mutual fund managers are wealthy, but they get paid whether they perform well or not.
· A few short-term investors have made it big, but they lose money more frequently than they make money (a few big gains can offset multiple losses, it’s a gamble).
· In short, no one has consistently done well timing the market, and you’re unlikely to be the first.
2. You miss out on too much
When most people try to time the market, they get out too soon. Eventually, the market falls, but then they wait too long to get back in. You also face a high opportunity cost because while you’re sitting around waiting, your money isn’t doing much. Studies have shown that it’s more lucrative to stay in the market than to jump in and out.
· Missing out on just a couple of good days has been proven to be a significant disadvantage. From 1993–2013, the S&P rose by an average of 9.2% each year. If you missed out on the 10 best days that year, your annual return would only be 5.4%. It’s not just the gains you miss, it’s also the compounding from those gains that you miss out on as well.
3. The fees associated with buying and selling can add up
Depending on how many stocks you own, you’re losing some money each time you buy and sell. Can you gain enough from timing the market to offset these additional costs and the tax hit? I very much doubt it.
4. Taxes
Each time you sell and take your gains, you’re forced to pay taxes on those earnings, which means you have less money to reinvest. Long term investors enjoy a great tax advantage, because the less frequently you sell, the less the tax man cuts into your future. Avoid underestimating the impact taxes can have on your holdings.
5. Buying into the market over time has proven to be an effective strategy
Take a look at a long term chart of the US stock markets or any other stock markets. The gains over time are incredible and regular investing is the key to wealth. And few investors can outperform a simple index fund, just keep investing regularly each month into this simple index fund.
Attempting to time the market is a mistake. Short term investing strategies create too many missed opportunities and incur too many costs, including taxes. It might not be exciting to purchase a blue chip stock or an index fund and hold that investment for 25 years, but that doesn’t mean it isn’t effective.
Avoid the temptation to get in and out of the market over the short term. It’s exciting to attempt to time the market, but remember the impact of missing out on just a couple of high-return days.
Until next time, stay safe, and please share this blog with anyone who might find it useful. Thank you!
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5 Reasons Why Trying To Time The Market Is A Mistake was originally published in The Capital on Medium, where people are continuing the conversation by highlighting and responding to this story.