To Your Wealth: Does timing the market make sense?
Leo Trotsky in War and Peace said, “the two most powerful warriors are patience and time.” While he may not have been thinking of investment strategies when he penned those words, they could easily be applied when considering what is commonly known in our industry as “market timing” or “timing the market.”
This approach teases with the lure of outsized returns based on a person’s ability to predict the future movements of financial markets. However, this strategy can also be equated to casting your hard-earned financial resources to fate as you walk the complicated and often perilous path of attempting to get the timing just right.
Relying on economic indicators, market trends, geopolitical events, and even psychological factors to forecast whether prices will rise or fall in the short-term or guessing when it is exactly the right time to buy or sell is fraught with risks that can unnerve even the most savvy investor.
What makes timing the market a risky proposition?
One thing that often works against the attraction to try and time the market is human psychology. Fear and greed, two common forces at play when attempting to cash in fast and big, lead timers to make impulsive decisions based on short-term market fluctuations. Fear of missing out on a potential windfall may drive investors to buy assets at inflated prices. At the opposing end, fear of loss may prompt them to sell during market downturns, amplifying losses.
Emotional bias can come into play, particularly confirmation bias, which is the tendency to only seek out information that supports a preconceived idea. Sometimes the notion proves out, which only validates the belief that timing—not time and patience—wins the battle.
Getting the timing wrong can also result in missed opportunities when investors find themselves having missed the narrow window and finding themselves on the wrong side of a potential market rally. Frequent buying and selling of assets incurred transaction costs such as fees and taxes, which can eat into investment returns. Additionally, short-term capital gains taxes are typically higher than long-term capital gains taxes, further reducing profits for investors who engage in frequent trading.
But perhaps most importantly is the fact that the financial markets are unpredictable. The intricate web of natural, man-made, and geopolitical events, to say nothing of shifts in myriad economic factors, is delicate to say the least. Attempting to forecast can be equated to going into battle time and time again wearing a blindfold. You may survive once, but your long-term life expectancy is highly questionable.
Patience and time, the allies of investors
A prudent alternative to this risky proposition of attempting to time the market is to have time IN the market. A disciplined approach to investing involves appropriate asset allocation, diversification, consistent contribution, and the proven ingredients of time and patience.
People sometimes have a negative reaction to the word “passive.” They equate it to meaning lazy, uninvolved, or disinterested. When it comes to applying a passive investment strategy the word is powerful. Passive investing, as compared with hoping to get the timing right, allows investors to capitalize on the power of compounding returns and stand strong during battles with market fluctuations resulting from unpredictable (and even predictable) events.
We’ve written other articles about standing your ground in the face of volatile markets. By staying invested through market ups and downs, investors are more likely to capture the full potential of long-term market growth.
While the allure of market timing may be strong, the risks of getting it wrong can have significant consequences on an investor’s financial well-being. At Financial Service Group, you can count on us to follow a disciplined, long-term investment approach based on diversification and asset allocation that studies have shown is more likely to yield more consistent and sustainable results in the unpredictable world of financial markets.
