There are many investors who believe in the strategy of “timing the market”. That means you sell out when the market is at a high, and then buy back in when the market is at the bottom; avoiding the loss of a market pullback.
Alex discusses a better alternative to this risky and ineffective approach.
McVean Wealth – Timing the Market
There are many investors out there who believe in the strategy of “Timing the Market”. That means you sell out when the market is at a high, and then buy back in when the market is at the bottom; avoiding the loss of a market pullback.
The trouble with this strategy is knowing when the market is at a high and when the market is at a bottom. In fact, very few investors have been able to predict these events correctly, and the strategy has left many investors financially ruined.
Here is what Peter Lynch, who has the best performance of any mutual fund manager ever, said about timing the market:
“Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections; than has been lost in corrections themselves.”
When you sell out of the market, you need to know when to get back in. Rebounds happen very quickly and if you miss a few weeks of the rebound waiting for another dip, you can significantly erode your wealth.
In this chart, we can see the significant effect even a single week out of the market can have.
If you had ten thousand dollars invested in the S&P 500 for 20 years, but pulled your money out of the market for the best performing week of that entire span, would reduce your total value by nearly 10%. And if you missed the 10 best weeks – you would have lost $500 of your principal investment.
You can see that staying fully invested is the best strategy.
So, what should you do instead of timing the market?
Try to put a minimum of one years’ worth of required income from your investments in either fixed income or cash. This allows your equities time to recover from a market pullback, and you won’t miss out on any of the best weeks of the recovery.
For McVean Wealth, I’m Alex McVean.