Stay the Course: The Perils of Market Timing

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Published by Taylor Financial Group

While the U.S. stock market is in its ninth year of the second longest bull market in history, the slide in the major indices in the last couple of weeks may have made you nervous. It’s been two years since we have seen this type of turbulence, so it can feel jarring. You are not alone. But, if you overreact to these short-term events and sell at the “lows,” there is a high probability that you may be engaging in market timing. This practice can be disastrous for many reasons, including going to a position that is too conservative and buying back into the market when prices are high.

The Psychology of Market Timing

It’s very easy to react emotionally to the ever-changing stock market.  According to Professor Richard Thaler of the University of Chicago, investors would be better off if they avoided the inclination to panic when markets go down. Dr. Thaler, who is a pioneer in behavioral economics, has the data to back up his argument that you may not want to make a sudden change. Since March 2009, 98% of market timers have underperformed a buy-and-hold strategy, according to research from Hulbert Financial Digest, which tracks investment advisory newsletters. A buy and hold strategy involves buying securities and holding them for a long period of time. This statistic also shows that if you are going to profit from market timing, you must do it correctly each time. In other words, you need to time the sell and the buy correctly. Very few investors can achieve that level of accuracy.

Explore a Buy and Hold Strategy

Investors are often told by their advisors to buy and hold investments for the long term, a strategy that can be easy during a bull market, but difficult to follow when the market is sliding. Yet, again, the data makes a powerful argument for this passive strategy. The University of Michigan performed a study which tracked stock market returns from 1963 to 2004 and found that 96% of the market gains were produced in less than 1% of the total trading sessions. If the markets have you nervous and you want to protect gains, you should consider rebalancing your investments regularly, take our risk tolerance quiz at least annually, and make sure your portfolio is diversified.

It’s also important to note that most bear markets have occurred in connection with a recession and there are no signs a recession is looming. At a recent TD Ameritrade conference attended by our very own Rob Taylor, Wharton Finance Professor Jeremy Siegel indicated that there’s “no recession that I can see in the cards for the next 12 months.” Therefore, the events in the last couple of weeks should be viewed as short-term bumps in the road. We continue to believe that a disciplined long-term approach will guide you through the daily ups and downs of the market.

If you are nervous about the market and would like speak with us about it, or if you have any questions about your portfolio, please contact us today.

 

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