Market timing is a lie

  by Shelley Seagler

by Shelley Seagler

“There are two kinds of investors, be they large or small: those who don’t know where the market is headed, and those who don’t know that they don’t know. Then again, there is a third type of investor – the investment professional, who indeed knows that he or she doesn’t know, but whose livelihood depends upon appearing to know.” – William Bernstein, 2001

At its core, market timing is based on the belief that the easiest way to make money is to buy low and sell high. Makes sense, right? But here’s where market timing gets it wrong – it’s also based on the belief that you can take advantage of small movements in price. The premise is that by making moves using some means, maybe a formula, pattern, or “documented trend,” to predict the future direction of the market, you can achieve significant profits.

So here is the bad news: market timing is a lie. The good news is that the data surrounding market timing doesn’t lie. As we continue digging into Snider Advisors’ Guiding Principles, we will examine why there is no place for market timing in a sound investment strategy.

For market timing to work effectively, you have to accurately time two moves:

  1. When to get out.
  2. When to get back in.

Moreover, you have to get the timing right on these decisions on a consistent basis. The truth is that an occasional market call is easy, but to do it consistently is categorically impossible.

Frankly, market timing is a compelling lure too many otherwise sensible investors have fallen for. What these investors fail to understand is the stock market makes dramatic moves up in relatively short periods. Miss these moves and you effectively miss the majority of the gains.

The chart below illustrates a comparison between the 20-year returns of equity investors (S&P 500 Index) from the 20-year period ending in 2013. Let’s say you remained invested the entire period, you would have earned a sizable 9.22% annualized return.

However, if you had been out of the market on the 10 best trading days, your return would have dropped to 5.5%. If you missed the 30 best days, your return dropped even lower to 0.9%. As you can see, the more days you missed the greater the impact. If you had missed the 60 best days, your return declines to -4.4%. Missed the 90 best days and your return plummeted to -8.6%

Both logic and evidence tell us it’s impossible to time the market over long periods with any inconsistency. So why do so many financial advisors claim they can do the impossible? Why is market timing being hawked not only as a cure for the buy and hold blues, but as a panacea for all investment woes?

The answer is simple and obvious. Salespeople have very different objectives than academicians. Academicians analyze facts in an effort to reveal the truth – and salespeople, well let’s just say that too many are less concerned with the truth than with their own financial bottom line.

There are only two reasons someone would try to convince you that you can make money by timing the market. They are either delusional and have convinced themselves they can do what no one else can – or they’re willing to sacrifice your security for their own greed. Admittedly, this is a strong statement, but the data doesn’t lie.

The Snider Investment Method never relies on trying to predict the future direction of price; it is strategically engineered with the objective of working in all market conditions. Does that mean its right for you? We think there’s a good chance it is, but you have to see for yourself. The best way to do that is to join us for a free information session. You’ll take away an understanding of who we are and what our strategy is. We’ll even show you detailed examples of you can use the Snider Method in your own portfolio.

To attend a free information session, join us online September 10th.

If you want to get the same performance you’ve always gotten – if you want to be worried about what the market is going to do next, then by all means, keep doing what you’re doing. But if you want to change your outcomes, sign up for our free information session.

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