Is Trying To Time The Market Worth It?

Is Trying To Time The Market Worth It?

Imagine you are the unluckiest investor on the planet. You tried to do all the right things. You used a highly-diversified stock market index fund for your investments rather than trying to pick individual stocks. You received a $10,000 bonus at work thirteen times over the last eighty years (you are a long-lived workaholic) and always invested it rather than spending it. But your timing always turned out to be terrible. Every single time you received your bonus, you invested it on the exact day the market was at a peak before experiencing one of its thirteen biggest drops. And we’re not talking about small declines either. Here’s the list of the thirteen days you invested your $10,000 and the subsequent market declines:

  • Investment Date             Subsequent Decline
  • 11/9/1940                        -34.5%
  • 5/29/1946                        -26.6%
  • 6/15/1948                        -20.6%
  • 7/15/1957                        -20.7%
  • 12/12/1961                      -28.0%
  • 2/9/1966                          -22.2%
  • 11/29/1968                      -36.1%
  • 1/11/1973                        -48.2%
  • 11/28/1980                      -27.1%
  • 8/25/1987                        -33.5%
  • 3/24/2000                        -49.1%
  • 10/9/2007                        -56.8%
  • 2/19/2020                        -33.9%

It’s now June 2020 and you have somehow managed to invest each of your thirteen $10,000 bonuses at precisely the worst possible time. Do you think the fund is worth at least the $130,000 you put into it? You might be surprised to discover that it is now worth over $8 million!

How is this possible? It’s simply because market gains far exceed market losses over time. The longer you remain invested, the greater the return your portfolio will experience regardless of when you started.

Would you have gained more by missing the worst days? Of course! But how can you identify them in advance? And since stock prices tend to drop rapidly when downturns begin, how can you possibly manage to beat all the other investors to the exit door? And do it thirteen times in a row?

It’s also during periods of high volatility when the best and the worst days tend to cluster together. By trying to avoid the worst ones you’re likely to miss the best ones as well. If you had missed just the 25 best days from 1970 through March 2020, for example, your return over that period would have been reduced by over 75%.

This is not to suggest that buy and hold is the right strategy for investing. Things do change over time: the economy, interest rates, even your own goals, just to name a few. A successful strategy includes rebalancing and reallocating your investment portfolio periodically. But not trying to time the market.

(Thanks to Justin Carbonneau and Dimensional Fund Advisors for the data).

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