The Perils of Market Timing

A 2016 study from Morningstar echoes a position many financial professionals have espoused for years: beating the market by sheer timing is extremely difficult (and sometimes costly).

“Timing the market” is an actual attempt to enact the adage “buy low, sell high”: an investor strategy of entering (buying) and exiting (selling) the market at just the right time, thus optimizing returns.

The strategy has one major flaw – knowing when to buy and sell. Morningstar found many investors lost money trying to guess correctly. When an investor tries to time the market, they have to be right twice – buying and selling at just the right time.

Morningstar found a gap of 79 basis points (.79%) between the returns of U.S. stock investors, and the total returns of the funds they invest in. In layman’s terms, that means investors lost .79% of potential returns by trying to time the market[1].

Research shows that investors are affected by all sorts of forces beyond rational assessment of financial data. For example, one study of investor behavior shows that single men are 67% more likely to buy or sell a security than single women[2].

Parsing through the data – and avoiding emotion –to invest in a volatile market often leaves investors in need of an independent-minded third party. A fiduciary financial advisor is committed to independence and will offer advice in an investor’s best interest.

[1] http://www.marketwatch.com/story/heres-how-much-investors-lose-thinking-they-can-time-the-market-2017-05-11

[2] http://www.marketwatch.com/story/how-trading-etfs-may-lose-you-moneyespecially-if-youre-a-guy-2017-03-27