Why Timing the Market Can Hurt You, Especially if You Plan On Leaving Work Early

No one can predict the future. While "experts" can share their predictions, timing the market can ultimately be a (costly) guessing game.

When news stories break about the latest “meme stock” or market drop, it’s natural to wonder if it’s time to rethink your investment strategy. Are you missing out by not purchasing the latest hot stock? Is it unwise to stay invested even as the market trends downward? 

These are valid questions, and how they’re answered is especially important as you near the finish line for early retirement. Let’s consider “timing the market” and what you may want to consider doing instead.

What Does “Timing the Market” Mean?

The term “timing the market” refers to moving your investments in and out of the market based on predictions of how the market will perform. This is commonly known as “active investing” and is considered to be the opposite of passive investing, which uses a “buy and hold” strategy.

If you’re timing the market, you may purchase more of a particular stock because its value is projected to increase. Or, you may choose to sell a stock because others predict its value will go down.

Timing the market often coincides with short-term events, like breaking news, geopolitical unrest, or large company announcements. For example, if Apple unveils a new type of disruptive technology, investors may take that to mean that their stock will soon soar. On the other hand, if a significant company experiences some sort of scandal, recalls, or reports poor profits, investors may be inclined to sell off stock quickly. 

The Trouble With Timing the Market

No one can predict the future. No crystal ball can tell an investor exactly what the market will do tomorrow. So while “experts” can share what they think will happen, timing the market is ultimately a (costly) guessing game.

Suppose Wall Street fund managers, who spend their careers picking stocks, have difficulty consistently outperforming or maintaining investment performance. In that case, it is likely hard for an average investor to do the same. 

Even if you do reasonably well trying to time the markets, your transaction costs and short-term capital gains liability could outweigh your profits.

The most compelling argument against trying to time the market is a recent study by JP Morgan. They found that over 20 years, between 1999 and 2018, investors who missed the top 10 best days in the market saw their returns cut in half compared to those who stayed invested the entire time.1 

In other words, even if you can bypass the downturns, you’re still at risk of significantly reducing your returns over the long run. 

Why It’s Better to Stay Invested

Staying invested throughout all the market ups and downs is known as a buy-and-hold strategy. Essentially, you and your investment advisor are focusing on long-term market performance, which historically has trended upward. Rather than get caught up in day-to-day trends or short-term factors, you’re keeping your eyes on the horizon.

Following a buy-and-hold strategy helps ensure you don’t make impactful financial decisions based on impulsive reactions or emotional triggers. These quick, short-term decisions may impair your ability to see the whole, unbiased picture — and they aren’t always made with your long-term goals in mind.

How to Set Your Portfolio Up for Success

So, what can you do to avoid the temptation of timing the market? Here are our top four tips.

Tip #1: Think About Diversification

You’ve likely heard the phrase, “don’t put all of your eggs in one basket!” It’s a common phrase, and for a good reason!

A diverse portfolio helps protect your investments from significant losses since every area is well-concentrated. If your stocks suddenly drop, the other assets within your portfolio may still yield favorable returns. These could include bonds, ETFs, mutual funds, alternative investments, etc.

Tip #2: Keep a Long-Term Outlook

We can’t emphasize the importance of maintaining a long-term outlook enough. Investing isn’t meant to be a get-rich-quick scheme; it’s a strategy designed to reward patient investors over time.

In a way, the market works against fund managers who try to “beat” the market through marketing timing. To show this, it’s been found that only 18% of US equity funds and 15% of fixed-income funds have survived and beaten their target benchmarks over the past 20 years. 

Tip #3: Consider the Cost Efficiency

Your investment gains should outweigh the cost of maintaining your portfolio. If you’re spending more on transaction costs, portfolio management, and taxes than you’re earning in returns, it’s time to rethink your asset allocation and investment strategy.

Tip #4: Work With a Knowledgeable Financial Partner

One of the most valuable things a financial advisor brings to the table is a knowledgeable and unbiased point of view. When you feel stressed or concerned over market performance, your advisor is there to help you make informed decisions with a long-term focus.

Interested in working with a financial advisor to align your portfolio with your more meaningful goals? Don’t hesitate to reach out and schedule some time to talk with our team.

Sources:1 Guide to Retirement