So what is market timing and are you losing returns because your money manager is doing it? Or even worse, have you been caught doing it all on your own.
According to Investopedia, market timing is “The act of attempting to predict the future direction of the market, typically through the use of technical indicators or economic data. ” 1.
If you have ever watched any of the financial channels on TV, or been on a financial website like Yahoo Finance, they are constantly promoting Market Timing. Every day I check Yahoo Finance there is some new trend that somebody has predicted in the market. One day they say, this bull market is just getting started. Then the next day they say, indicators say that market is in for a huge downturn. Which one should we believe, or would our retirement portfolio be better off if we just avoided the market timers opinion?
Academics and Research
Listen to what Investopedia has to say further about market timing…
“Some investors, especially academics, believe it is impossible to time the market. Other investors, notably active traders, believe strongly in market timing. Thus, whether market timing is possible is really a matter of opinion. ” 1.
I am going to go with the academics on this one. I have the data to prove that market timing does not work.
|CATEGORY||1984-2013 Annualized Return|
|S&P 500 Index||11.10%|
|Dalbar Average Investor – Equity Fund||3.69%|
|CPI (representing Inflation)||2.80%|
As we see here in this little chart, if an investor would have just been invested in the S&P 500 for the last 30 years they would have gotten over an 11% return. But what did the average equity investor get? 3.69%. That is just over inflation.
So why did the average equity investor lose over 7% annual growth in their portfolio? A part of that is due to costs, but the vast majority is because of market timing. Investors seem to almost always be wrong when it comes to deciding when to be in the market and when to take their money out.
Lets take 2008-2009 as an example. The end of 2008 the market is taking a nose dive and what does everyone tell you to do. Get out of the market. So you take your money out because of the fear that it will never come back. Ultimately you are selling low. Then on March 9, 2009 the bottom finally hits and the market begins to take huge jumps upwards. But you are not invested so you get none of that growth. When you decided to get back in you were buying high. The market today is reaching new highs and is way past where it was before the crash in 2008.
The most simple thing to say in investing is buy low and sell high. Obviously it is not that simple to actually do. Market timing is detrimental to your long term retirement goals.
– By Jimmy Hancock
1.”Market Timing Definition | Investopedia.” Investopedia. Investopedia US, n.d. Web. 16 June 2014. <http://www.investopedia.com/terms/m/markettiming.asp>.
2. Matson Money. Separating Myths From Truths, The Story of Investing. N.p.: n.p., n.d. PPT.