Market Timing & Disciplined Investing.

May 23, 2016

Timing the Market Rarely Works.

The best protection against poor timing is a disciplined strategy of consistent investing.

To time the market, an investor must correctly predict the exact best time to buy. And then the exact best time to sell. Twice! Not just once. Even the most experienced professional investment managers and money managers can't do it, so how can individuals be expected to?

"The best protection against poor timing is a disciplined strategy of consistent investing."

It's a natural tendency to want to buy low and sell high. But people often do the opposite. Looking back, wouldn't the best time to buy have been in the midst of the Great Recession, when nobody else wanted to? Of course, but for most people it's extremely difficult to do the opposite of everyone else.

There has been extensive research as to the impact of trying to time the market. For the 20-year period ending in 2013, the average equity fund investor achieved an annual return of just 5.02% compared with 9.22% for the S&P 500. That's a 4.2% gap!¹ A study by Morningstar found that badly timed purchases and sales of fund shares by investors cost them roughly 2.5% a year over the past decade through 2013.²

Disciplined Investing.

Investing with discipline means that you invest on a consistent, periodic schedule. Similar to retirement accounts, you invest a set amount every month regardless of the market's mood. You will buy a few more shares when prices are low and a few less when they are high. Most importantly, you are invested in the market at all times, and, over time, the per-share cost of the security should become smaller and smaller.

This approach is called "Dollar Cost Averaging" and is an effective strategy against market timing.

Typical "Market Timing" behavior: The market has been surging over the past several months. So you put some money to work and it goes up even further. You smile to yourself and feel satisfied, but the temptation to chase quickly becomes addicting. The thrill of the gains grow, and so you buy more at a higher price.

You convince yourself it's a good investment, so you hold on to it. Finally, you watch all of your gains disappear as the stock/fund completely reverse course. Now you are reluctant to sell because you don't want to take a loss; it's hard enough to see it on paper. It's human nature to have these emotions, but when you act on them, it can be devastating to your overall wealth accumulation.

The time to buy is typically when nobody else wants to but that is a hard road to travel. It is far safer and simpler to stay the course and invest consistently.

1. 2014 DALBAR QAIB Highlights Futility of Investor Education (Dalbar)

2. Bad Timing Costs Investors 2.5% a Year (Morningstar)

3. 2014 DALBAR QAIB Highlights Futility of Investor Education (Dalbar)