Personal Finance

What market timing can really cost you

Here's why you don't panic when the market corrects
Here's why you don't panic when the market corrects

Admit it: This market has you rattled.

It's hard to watch swings of several hundred points in a matter of minutes, and hard-to-miss images of dismayed traders aren't helping either. But if you are thinking about bailing on the market, stop and consider the real consequences.

Investors who try to time market highs and lows almost always hurt their performance over time. An analysis of investor behavior from SigFig, an investment planning and tracking firm, found that during the market correction in October 2014 roughly one in five investors reduced their exposure to equities, mutual funds and ETFs, with 0.6 percent selling 90 percent or more. That may have seemed smart at the time, but SigFig's analysis found that the more people sold, the worse their investments performed.

"Those who appeared to panic the most—for example, those who trimmed their holdings by 90 percent or more—had the worst 12-month-trailing performance of all groups," the researchers concluded. Their portfolios delivered a trailing 12-month return of -19.3 percent as of Aug. 21, compared with -3.7 percent for the people who did nothing during that October correction.

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Attempts to time the market don't just hurt market performance. Elizabeth Scheiderer, a certified financial planner with NCA Financial Planners, points out that investors can incur trading fees, and, depending on the accounts they are trading in, additional tax expenses.

Increased market volatility also makes market timing more challenging, since ups and downs can come closer together.

Why, then, do people think they can intuit the market's ups and downs?

"I think it kind of goes along with why people go to Vegas and elsewhere and think they can beat the house. Sometimes they do, but most of the time they don't," said Craig Brimhall, vice president of retirement wealth strategies at Ameriprise Financial. "The biggest problem is you have to be right twice," not just selling at a market top but buying at the bottom. "Somebody would own Tahiti by now if they could do it."

Zachary Abrams, manager of wealth management and portfolio analysis at Capital Advisors, has another idea. "The reason why I think most people get this wrong is they are focusing on the returns and not the risk," he said. "They haven't planned around a loss, so when it comes they don't know what to do. There is no real exit strategy for them when things go south."

Abrams said he has gotten about 20 calls from clients, most just asking for the firm's take on the market gyrations. But not everyone is so calm: One client has emailed him four times, he said, and shifted from jitters to an appetite for buying when things settle.

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Scheiderer has a few suggestions to help investors keep themselves from trying to time the market.

First and foremost, she said, remind yourself of your long-term goals, and your stated risk tolerance. It is easy to have high risk tolerance when markets are rising, but equity exposure comes with some downturns, as well.

If you still feel the urge to trade, Scheiderer suggests setting aside a "play bucket" of money to use for market timing (after telling your spouse, of course). If you feel you have to act on a market view, that is the money to use, but you can leave the bulk of your money invested according to your long-term plan.

Some may take that approach already. While data from the Investment Company Institute shows that individual investors tend to add to their equity fund holdings when the market is rising and sell when it is falling, "the flows are pretty small," said Sean Collins, senior director of industry and financial analysis.

Even with strategies for market swings in place, though, investors may feel jittery. Scheiderer has advice for those people, as well: "Go on vacation," she said.