Over the years we have made our position on market timing abundantly clear. We have never wavered from the belief that staying invested in the market and rebalancing through the ups and downs is the best way to capture returns. It’s a strategy that works in both bull and bear markets, yet it is one we hear called into question by some media pundits and forecasters during periods of uncertainty and volatility.
Why is this the case? We believe it has to do with some people’s perception that if you’re not trying to time the market, you’re in effect doing nothing at all to help your portfolio. The whole concept of ‘doing nothing’ is anathema to many successful people. You didn’t earn your money by not doing anything, so why would you be able to grow it without making bold moves? This is a counter-intuitive barrier that we must overcome if we are to make smart decisions for our long-term investments.
Another reason is the seemingly daily bombardment of predictions that prompt investors to take action based on dubious information or reasoning. We are pressured to think (be it in the form of advertising, word of mouth, or our own desire to believe) that it is possible to increase our returns by going in and out of the market at the right times. This notion proves to be especially tempting when markets are volatile. We experience something akin to a fight or flight response, and the desire to stop the bleeding and head for safety can be overpowering.
It is critical that we resist this instinctive emotional response. Fortunately, the data on the subject provide us with ample reasoning to do so.
The following comes from the Hulbert Financial Digest, an objective and independent monitor and aggregator of several hundred funds that specialize (and claim to be experts in) market timing strategies. The results show just how difficult it is to find a strategy that is more effective than remaining invested at all times.
- Fewer than 25% of the “expert” market timers had higher exposure levels on March 9, 2009 (the bear market bottom) than on October 9, 2007 (the market top). In fact, 48% had lower exposure levels at the market bottom when stocks were at their cheapest than at the top when they were at their most expensive.
- Only 6% of the “expert” market timers correctly called both the top and bottom of the 2007-2009 bear market.
- Only 9% of the “expert” market timers had decidedly higher average equity exposure levels during the subsequent bull market than they did during the 2007-2009 bear market.
- Even more telling, 54% of the “expert” market timers had higher exposure levels during the bear market than in the bull market that followed, meaning they missed out on the recovery.
- Fewer than 50% of those who satisfied one of these criteria were able to do so during the 2000-2002 bear market.
It is important to attempt to separate luck from skill. However, numbers like these go a long way to suggest that “expert” market timers are lacking on both fronts.
The Hulbert report paints a clear picture of the dangers of trying to time the market. Staying invested and rebalancing, regardless of how powerless it might feel, is an empowered choice that will help you protect and grow your portfolio over the long-term. Sustainable long-term growth is possible, even if you have to weather a few market storms along the way. By setting goals and sticking to your long-term asset allocation, you will be better prepared to handle the short-term fluctuations of the market and reap the benefits of empowered investing.