Investor Mistake: Trying to Time the Stock Market
AI's response in regular print | Beverly Hills, CFP®, Joe O'Boyle's in italics
“Investor Mistake: Trying to Time the Stock Market”
It’s time in the market, not timing the market, that matters most for long-term stock investing.
No one can consistently and accurately predict short-term stock market moves.
Consequently, long-term investors who move all of their money out of stock mutual funds (or ETF’s) to sit on the sidelines during market declines, risk losing out on periods of meaningful price appreciation that follow downturns. The long-term compounding effects of this investment mistake can be staggering.
Patient investors who remain calm and who don’t get rattled by short-term market gyrations tend to be significantly more successful than those who let their emotions override a longer-term strategy and make knee-jerk reactions.
3 Key Takeaways for Investors:
1. Long-term investment results are more dependent on investor behavior than on mutual fund (or ETF) performance.
2. People are often their own worst enemies when it comes to investing. Due to the effects of compounding, missing out on stock market upside can be significantly more detrimental to long-term investors than the pain of enduring short-term market declines.
3. Ultimately, your long term investment success, when investing in stock mutual funds (or ETF’s), is only as good as your ability to stick with your investment plan through all of the market ups and downs. Especially the downs.
Market Timing: A Costly Investment Mistake
Investing is often seen as a strategy game, and it’s tempting to think you can time your moves to maximize gains and minimize losses. However, history and data have repeatedly proven that it is time, not timing, that matters most in investing. Trying to time the market — predicting when prices will rise and fall — is not only incredibly difficult but can also significantly impact long-term investment results.
Take, for instance, a hypothetical $10,000 investment in the S&P 500 Stock Index made on July 1, 2013. An investor who had stayed the course for 10 years, even through the two bear markets (declines of 20% or more) during that period, would have seen their initial investment nearly triple to $27,248 by June 30, 2023. This growth reflects the power of long-term, patient investing.
However, if the same investor had tried to time the market and missed some of the best days, the results would have been drastically different. For example, missing the 10 best days during this period would have slashed the portfolio's value by 45%, leaving them with $14,922. Missing the 20, 30, and 40 best days would have resulted in even more significant losses, depleting the portfolio to $10,838 (60% loss), $8,347 (69% loss), and $6,553 (76% loss), respectively.
These numbers underscore the cost of being on the sidelines (out of the market) during the stock market's best days. Trying to time the stock market increases the risk of missing periods of significant price appreciation that typically follow downturns. The markets best days often occur after significant market declines.
Stock Market Performance vs. Investor Performance
Investment research firm Dalbar Inc. publishes an annual Quantitative Analysis of Investor Behavior (QAIB) report which studies investor performance in mutual funds. The findings are the same each year. Investors are drastically underperforming their own stock mutual funds performance because of their behavior. In other words, they’re jumping in and out of their stock mutual funds at the wrong times. They’re selling when markets are declining and headlines are scary and buying when markets are rallying and optimism abounds.
To illustrate this point… for the 30 year period, from 1993 to 2022, the benchmark S&P 500 stock index returned 9.65% per year while the average stock mutual investor returned 6.81% per year (Dalbar). That’s nearly 3% per year in underperformance for the average stock investor, which is staggering over a 30 year time period. To quantify the common investor mistake of trying to time the market: a one time $100,000 investment over this 30 year period translated to a $721,701 balance for the average stock mutual investor, but a $1,585,839 balance for the S&P 500 stock index. The average investor’s return was less than HALF the stock benchmark’s return — a direct result of poor investor behavior.
Taking your money out of the market on the way down means that if you don’t get back in at exactly the right time, you can’t capture the full benefit of any recovery. Every S&P 500 stock index decline of 15% or more, from 1929 through 2020, has been followed by a recovery. The average return in the first year after each of these declines was 55%. Missing out on those key few days can have a profound long term impact on your investment returns.
Dollar Cost Averaging: An Approach for the Hesitant
For investors who are hesitant to invest a lump sum, particularly in volatile markets, dollar-cost averaging could be an option. This strategy involves investing a fixed amount regularly, regardless of stock market conditions. During market declines, this approach can result in purchasing more shares at a lower average cost. When markets eventually rise, these additional shares can increase the value of the portfolio.
Conclusion
The takeaway? Timing the stock market is a risk that can significantly hurt long-term results. For long-term investors, the danger of missing the best growth periods in the market significantly outweighs the risk of experiencing painful downturns. Instead, stick with your investment plan. It's more beneficial to stay invested over the long term and let the power of compounding do its work. No one can consistently predict short-term market moves with complete accuracy, and those who try risk missing out on significant growth opportunities. The behavior of an investor significantly impacts investment outcomes and underscores the importance of discipline, patience, and a long-term approach in investment decisions. For investors, patience is indeed a virtue.
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Joe O'Boyle is the founder and principal of O'Boyle Wealth Management, a full service financial planning and investment management firm, located in Beverly Hills, California. Joe O’Boyle was named to InvestmentNews 40 under 40 class of 2016, and has a catalog of financial planning and investing articles on Money.com & U.S. News. Disclosure information.