6) Market Timing- Should you try to get out of the Market when it’s going down and then get back in when it is going up?

If investing was this easy.  Attempting to get in and out of the market to avoid losses and capture gains is known as “market timing.”  Let’s look at the odds of doing this successfully. 

In Javier Estrada’s article, “Black Swans and Market Timing:  How Not to Generate Alpha “he states in the article’s abstract, “The evidence from 15 international equity markets and over 160,000 daily returns indicates that a few outliers have a massive impact on long-term performance. On average across all 15 markets, missing the best 10 days resulted in portfolios 50.8% less valuable than a passive investment; and avoiding the worst 10 days resulted in portfolios 150.4% more valuable than a passive investment. Given that 10 days represents less than .1% of the days considered in the average market, the odds against successful market timing are staggering.”

There are many other published studies confirming the low odds to successfully time the market and attempting to do so can dramatically lower investment results.

An important point to understand is it difficult to predict when and how much the market will move up or down, but even more important is market gains happen during short bursts. Being out of the market even a few days can result in missing these important gains.

The prudent course is to remain fully invested during all phases of bear and bull markets. This is extremely difficult, especially when the market is rapidly falling and the “end to the world” seems imminent. “Genius status” is conferred upon the lucky individual(s)who got out prior to the drop. 

It is as difficult to remain fully invested when the market becomes extremely frothy and overvalued.  There are warnings from many that the market cannot continue to rise forever and that there will be a “crash” soon.

Develop strategies to avoid getting caught up in the emotions during these times.  Being invested and staying invested will have the greatest impact on investment results. Chances are high that investments will come back after declines and investment income will remain unaffected.

“Market timing creep” can happen with investments allocated to several asset classes. Determining one’s asset allocation is the result of careful planning taking into consideration such factors as tolerance for risk, age and financial situation. There are valid reasons to adjust one’s allocation from time-to-time but if it is happening frequently, it can very much resemble market timing.

As Mark Twain famously said,

“October.  This is one of the particularly dangerous months to speculate in stocks. Others are November, December, January, February, March, April, May, June, July, August, and September.”