Now as Always: Beware the Perils of Market Timing
September 6, 2019 - Between “inverted yield curves” and China trade wars, does it make sense for investors to try moving to the sidelines until the coast seems clear? For several reasons, we caution against trying to time the market — at any time.
With all of the recent scary talk of an "inverted yield curve" and "trade war with China" it's certainly understandable if you are considering shifting your portfolio to higher ground until the coast seems clear. Sell investments now and go to cash for a bit. Wait until the predicted, "inevitable" recession occurs, and swoop back in, buying at much lower prices. Simple, right?
Here are four important reminders on the perils of trying to time the market - at any time.
- Market-Timing Is Undependable. Granted, one day we will get another stock-market-correcting recession. But when? Not only might you guess wrong about when it's time to get back in. As famed fund manager Peter Lynch quipped, "Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves."
- Market-Timing Odds Are Against You. Over time and overall, markets have eventually grown into alignment with the real wealth they generate. But they've almost always done so in fits and starts, with some of the best returns immediately following some fo the worst. If you try to avoid the downturns, you're essentially betting against the strong likelihood that the markets will eventually, and often suddenly, continue to climb upward as they always have before.
- Market-Timing Is Expensive. Whether or not a market-timing gambi plays out in your favor, trading costs real money. If you decide to get out of positions that have enjoyed extensive growth, the tax consequences in taxable accounts could be financially ruinous.
- Market-Timing Is Guided by Instinct Over Evidence. Your brain excels at responding instantly to real or percieved threats. When market risks rise, your instincts induce you to take immediate figth-or-flight action, If the markets were an actual forest fire, you would be wise to heed these instincts. But for investors, the real threats occur when your emotions run ahead of your rational resolve.
We would suggest your existing plans still represents your best odds in an uncertain world. Market-timing may offer the brief relief if you guess right, but it ultimately runs counter to your most reliable straegies for building durable, long-term wealth.