Why market timing cannot beat a disciplined strategy
Today’s financial volatility defies words to describe its effect on most investors
Money Matters By John J. Grande, CFP; Traudy Grande, CFP; and John S. Grande, CFP
Whether the news affecting the stock markets came from overseas economic issues, speeches by the Federal Reserve Bank, political unrest in the Middle East, decline in oil prices, or home-grown economic reports, investors are left unsure of just what to do.
Many investors—just out of fear—are contemplating or have exited the stock market, in part or completely. Pulling out of the stock market and waiting to re-enter it is called market timing. The term is a strategic investment theory to predict future market movements that investors use to time their buying and selling decisions.
It is understandable that when markets are high, one would think of selling out at the top. Conversely, when markets are low, fear can persuade an investor to get out of the markets with the idea that stocks were heading lower–and perhaps on the way back up, they will re-enter the market again.
The problem with this strategy is that investors usually guess wrong because of either fear or greed being the catalyst for their move. When this is done and an investor guesses wrong, the cost of missing out on the upward market moves, or the best market days, can make a huge difference in their returns.
A widely cited study, called DALBAR’s Quantitative Analysis of Investor Behavior, compares investors’ average annual returns to market returns. The latest DALBAR study shows that over the 30 years that ended Dec. 31, 2014, the average equity investor earned 3.79%, while the market returns averaged 11.06% during the same period. The rational for this difference in returns is that the average investor timing the market incorrectly.