The Perils of Market-Timing: A Reminder

There is no lack of unquieting news that impacts the markets daily. And volatility looks to be a big player in the markets for at least the near-term. Here are a few important reminders on the perils of trying to time the market – at any time. To take some kind of action may offer brief relief, but market-timing ultimately runs counter to your best strategies for building durable long-term wealth. Many of you know that I point to my “favorite chart” in times of turbulence, and understand how knowledge of that chart (showing how markets work over time) can ease your mind and help you sleep.

  1. Market-Timing Is Undependable. It is nearly certain that we will experience another recession; the question is only when. I overheard a man last month brag to his friend, “I sold all my stocks on Tuesday” – I just quietly shook my head. In hindsight, that was not likely his best move. But it is a normal human emotion to want to do something. Market history has shown us time and again that seemingly “sure bets” often end up being losers instead. Even at year-end 2018, when markets dropped precipitously almost overnight, many wondered whether there would be nothing but bad news in 2019. As we now know, that downturn ended up being a brief stumble in an up market. Had one sold everything then, they might still be wondering when to get back in and missed out on the gains. The point is that simple market-timing trades, although tempting, usually don’t work toward your long-term goals. In fact, they are more likely to hurt.
  2. Market-Timing Odds Are Against Us. Market-timing is stressful, and the odds are against us. That’s in part because “average returns” are not the norm, volatility is. Over time, markets have gone up in alignment with the real wealth they generate. But they’ve almost always done so in dramatic fashion, with some of the best returns immediately following some of the worst. By trying to time it by selling out to avoid the downturns, it is essentially betting against the strong likelihood that the markets will then continue to climb as they always have before. That’s a bet against everything history tells us about expected market returns. The important part is positioning your portfolio for your needs, in anticipation of these ups and downs.
  3. Market-Timing Is Expensive. Whether or not a market-timing gambit plays out in your favor, all trading has real-money costs and implications. To add insult to injury, when investors make sudden changes that aren’t part of a larger investment plan, the extra costs generate no extra expectation that the trades will be in your best interest. Selling positions that have enjoyed much growth can make the tax consequences (in taxable accounts) financially ruinous.
  4. Market-Timing Is Guided by Instinct Over Evidence. As has been well studied, human brains excel at responding instantly – instinctively – to real or perceived threats. When fears of market risks arise, these same basic survival instincts flood your brain with chemicals that induce you to want to take immediate fight-or-flight action. If the markets were an actual forest fire, you would be wise to heed these instincts. But for investors, the real threats occur when behavioral biases cause emotions to run ahead of their rational resolve. That’s where we come in, to take a cool look at whether making a change is a rational part of your overall financial plan. Changes and trades should stem from your own personal situation and a macro big-picture view, not knee-jerk reactions to daily tweets or news. Talk to us if you are feeling worried about the volatile markets.
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Blue Spark Capital Advisors

We're a fee-only Registered Investment Advisory and financial planning firm based in New York City and the Berkshires.

We specialize in working with women after divorce, death of a spouse, or other life transitions such as retirement or job change. We provide financial planning and investment management services.

We believe in a holistic approach. Movement in each piece of your financial plan impacts the others, so we consider your entire picture.

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"Integrity without knowledge is weak and useless, and knowledge without integrity is dangerous and dreadful."
– Samuel Johnson (1709-1784)
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