This market cycle can make it tempting for investors to attempt to buy and sell stocks at particular times to maximize gains and avoid down periods. Here’s why you should avoid practicing market timing.
There are many things that could affect the overall equity market and any individual stocks you may own—from economic trends to geopolitical events like an election. What is certain is that the market will always have its peaks and dips.
This market cycle can make it tempting for investors to attempt to buy and sell stocks at particular times to maximize gains and avoid down periods. This investment strategy is known as market timing, the practice of moving in and out of the market based on predicting when the market will shift.1
Missing out on Market Moves
Although the idea of market timing can be tempting, it is also extremely difficult for most investors to predict the future of the market. In fact, those who try to time the market may actually underperform investors who simply buy and hold stocks.2
One reason is the tendency of the market to experience big upswings and downswings on adjacent days during periods of market volatility. That means an investor who sells after a substantial down day for the market may miss a subsequent period of gains. Also, many investors let emotions dictate their actions, leading them to buy stocks when the market has already gained in value, only to sell when the market has declined, leading to sluggish returns. Moreover, even with sophisticated tools to analyze the factors affecting stock prices, it is very difficult to forecast future stock market movements.
Also, missing out on just some days in a market cycle can drag down returns considerably. The S&P 500 generated an annualized return of 9.6% between 1990 to 2018 for investors who were invested during that entire period. Investors who missed just the 15 best days during that period only enjoyed returns of 3.6%, and investors who missed the best 90 days actually suffered an annualized loss of 3.5%.3
Market Timing Can Carry Costs
Along with possibly missing out on market gains, market timing can have other penalties. The transaction costs from buying and selling stocks can add up and drag down overall returns. In addition, investors who do sell stocks for a gain will likely trigger capital gains taxes, again reducing their overall profit.1
Creating and staying with a financial strategy can help you avoid making rash moves in response to what’s happening in the market. A Financial Advisor can help you tailor a framework that’s set against your long-term goals and considers key aspects of your financial life, from your age and aspirations to current market opportunities. While market conditions may vary, a personalized, adaptable wealth strategy that’s centered around your life goals should remain a constant as you build your wealth and plan for your future.
3 Morgan Stanley Client Conversations & Primers, Intro to Investing PDF – Market Timing Is a Flawed and Costly Strategy Charts
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