Market timing is not good use of your time
Just a year ago, stock investors were licking their wounds. U.S. indexes finished 2018 with losses — the S&P 500 was down 6.2%, the worst annual performance since the 2008 financial crisis.
Despite the corporate tax cut-powered economic growth of 2.9%, investors were unnerved by mercurial U.S. trade policy, the uncertainty of Brexit, a slowdown in China and perhaps most critically, the Federal Reserve's four quarter-point short term interest rate increases.
2019 started with all of those factors in play, which led many business leaders, economists and analysts to talk openly about their fears of a recession. But as we now know, that's not exactly what happened. While economic growth did downshift to the post Great Recession trend of about 2.2.5%, the Federal Reserve reversed course and cut interest rates by a quarter of a percentage point in August, September and October.
Those three actions, along with other global central banks' accommodating monetary policies, helped global stock markets power higher in 2019.
Given that very few were able to accurately predict the performance of 2018 or 2019, it's worth considering how the two years, along with the past two decades, make a great argument for why trying to time the market is just not worth it. In my book, “The Dumb Things Smart People Do with Their Money,” I devoted a chapter to market timing, because I had encountered otherwise intelligent people trying “to predict short-term market movements--and failing . ... By trying to time the market, you're potentially making investment decisions that are based on emotions, and that are colored by your own individual biases and blind spots.”
Of course, timing the market can be alluring. Who would not want to be the person who knows the exact moment when to get in and out of an investment? But it's a lot harder than it sounds.
What if you had poured over the financial press in 2018 and concluded that 2019 would be another bad year for stocks? Or what if you had bought into the idea that you could never, ever own a stock again after the horrible lost decade of the 2000s, during which the S&P 500 delivered annual returns of -2.7%? And yet, if you had bailed out of stocks before the next decade began, you would have missed out on the snappy 2010-2019 11.2% annual returns.
Even within the 2010s, there were moments when you might have doubted whether or not you should stick to your game plan. According to LPL Financial, during the past 10 years, the S&P 500 posted six corrections (a 10% decline from a 52-week high), including two 19% slides — one in October 2011, the other in December 2018.
Instead of trying to game out the peaks and valleys of any asset class, start off the new decade with a simple approach that I outlined in my book: “Decide upon your goals and your risk tolerance, craft a plan to allocate your investments accordingly across the different classes or types of investment using the appropriate index funds, and then stick with the plan. On a regular basis (quarterly, semiannually, or annually), rebalance your accounts, or activate auto-rebalancing if your retirement plan or financial institution offers it.”