If you are educated about the stock market, the term "timing the market" probably sounds familiar. It refers to the idea that investors should buy stocks low and sell them high shortly after. It's a smart, swift and painless method ... or is it?
You might compare this method to switching lines at the supermarket checkout when you see another one moving faster. That is, it was moving faster until you decided to change lines. Trying to time things out of your control so they work in your favor sometimes works, and sometimes it doesn't. Either way, it's very hard to predict.
There are too many factors influencing the price of stocks and bonds; trying to predict what the market is going to do is extremely difficult. A smarter approach is to spend more time in the market by holding long-term investments rather than trying to time the market.
A common myth about investing is that success is all about strategy, such as in timing the market. This myth is one reason why many people fear investing: They think it's only for experts who have learned systems and charts and spend all their time studying the markets and poring over reports. While timing the market is a novel idea, even professional traders, with all the training, tools and time at their disposal, regularly post losses. Some perform well for a while, but it's very difficult to consistently win over the long term.
Nevertheless, there is no shortage of people who claim to know how to beat the odds. You'll find dozens of stock alert services on the Internet, all offering to help you with timing the market. Be warned: If you are not an expert, the odds are very much stacked against you.
On the other hand, if you study the Dow Jones Industrial Average, you'll find there's never been a 20-year period during which the index has failed to grow. It moves up and down a lot, but investors willing to take a longer-term approach, an approach called buy and hold, have historically seen positive gains regardless of day-to-day market volatility.
Longer-term approaches are a better strategy. JP Morgan compiled some research showing the importance of this. They tracked the performance of a $10,000 investment in the S&P 500 over a 20-year period. It showed a healthy average return of 9.85 percent per year. But they modeled what would happen if the investor withdrew from the market temporarily and missed the 10 biggest days on the stock market for that 20-year period (just 10 days out of 7,304). The result was a reduced return from 9.85 percent to 6.1 percent, which means a decrease of $32,665 in gains. And the more days missed, the lower the gains fell.
Nobel laureate William Sharpe found that "market timers" must be right an incredible 82 percent of the time just to match the returns realized by buy-and-hold investors.
The tactics of timing the market are fraught with danger; history vouches for the fact that "time in the market" is the safer strategy. When it comes to your financial success, it pays to invest your time, not just your money, in your portfolio.
(Editor's Note: This article originally appeared at Investopedia.com.)
— By Humphrey Thomas, CEO of HG Thomas Wealth Management