A Timely Reminder on the Perils of Market Timing

Dear Clients:

It’s certainly understandable if the economic uncertainty unfolding in the daily news has left you wondering—or worrying—about what’s coming next. No matter how you feel about the U.S. entering into a recession, it’s hard to deny that the prospect is currently causing considerable market turmoil.

Regardless of how the coming weeks and months unfold, are you OK with gritting your teeth and keeping your carefully structured portfolio on track as planned? This probably doesn’t surprise you, but that’s exactly what we would suggest. (Unless, of course, new or different personal circumstances warrant revisiting your investments for reasons that have nothing to do with all the tea in China.)

That said, the news is admittedly unsettling. If you’ve got your doubts, you may be wondering whether you should somehow shift your portfolio to higher ground, until the coast seems clear. In other words, might these stressful times justify a measure of market timing?

Here are four important reminders on the perils of trying to time the market—at any time. Market timing may offer brief relief, but it ultimately runs counter to your best strategies for building durable, long-term wealth.

1. Market timing is undependable.

Granted, it’s almost certainly a matter of time before we experience another recession. As such, it may periodically feel “obvious” that the next one is nearly here. But is it? An imminent recession is possible, but market history has shown us time and again that seemingly sure bets often end up being losing ones instead. Even as recently as year-end 2018, when markets dropped precipitously almost overnight, many investors wondered whether to expect nothing but trouble in 2019. As we now know, that downturn ended up being a brief stumble rather than a lasting fall. Had you gotten out then, you might still be sitting on the sidelines, wondering when to get back in. The same could be said for any market-timing trades you might be tempted to take today.

2. Market-timing odds are against you.

Not only is market timing a stressful strategy, but it’s also more likely to hurt than help your long-term returns. That’s in part because “average” returns aren’t the near-term norm; volatility is. Over time and overall, markets have eventually gone up in alignment with the real wealth they generate. But they’ve almost always done so in frequent fits and starts, with some of the best returns immediately following some of the worst. If you try to avoid the downturns, you’re essentially betting against the strong likelihood that the markets will eventually continue to climb upward as they always have before. You’re betting against everything we know about expected market returns.

3. Market timing is expensive.

Whether or not a market-timing gambit plays out in your favor, trading costs real money. To add insult to injury, if you make sudden changes that aren’t part of your larger investment plan, the extra costs generate no extra expectation that the trades will be in your best interest. If you decide to get out of positions that have enjoyed extensive growth, the tax consequences in taxable accounts could also be financially ruinous.

4. Market timing is guided by instinct over evidence.

As we’ve covered before, your brain excels at responding instantly—instinctively—to real or perceived threats. When market risks arise, these same basic survival instincts flood your brain with chemicals that induce you to take immediate fight-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 behavioral biases cause emotions to run ahead of rational resolve.

We’d like to think one of the most important reasons you hired us as your financial advisor is to help you avoid just these sorts of market-timing perils—during just these sorts of tempting times. Even if you do everything “right” in theory, we still cannot guarantee your success. But we are confident that sticking with your existing plans represents your best odds in an uncertain world.

So, if you have your doubts, please let us know. It’s our job—not to mention our moral and fiduciary imperative—to offer you our best advice across all of the market’s moves. While market timing may be illusory, we are here for you, ready to explore real steps you can take to shore up your investment resolve, regardless of what lies ahead.

Not a client? Schedule a complimentary 15-minute call with a fee-only financial planner to discuss your situation.