The Folly of Market Timing

It’s tempting to think that you can improve your investment performance by jumping in and out of the market at the best times. Many financial pundits even suggest you do so, as they predict market crashes and booms. But knowing the best time to buy and sell is much easier said than done — and plenty of studies have supported that. For example, the folks at Index Fund Advisors noted that in the 20 years from 1994 through 2013, the S&P 500 index of 500 of America’s biggest and best companies averaged an annual return of 9.2 percent, enough to turn a $10,000 initial investment into $58,352. But any investor who missed the 10 days with the biggest gains would see their average return fall to 5.5 percent and their final total fall to $29,121. If you’re engaging in market timing, you may well be out of the market after downturns, missing some of the best days while you wait for a recovery to be clearly underway. As index-fund pioneer John Bogle has quipped, “Sure, it’d be great to get out of stocks at the high and jump back in at the low ... (but) in 55 years in the business, I not only have never met anybody who knew how to do it, I’ve never met anybody who had met anybody who knew how to do it.” Market timing also can be expensive. Getting in and out of investments frequently can leave you with short-term capital gains (if you’re lucky to have avoided losses) that are generally taxed at a higher rate than long-term gains. Frequent trading can generate lots of commission fees, too, from all the buying and selling. Remember that over the very long term, the S&P 500 has gone up in more years than it has gone down. You’re likely to see your money grow simply by being patient — perhaps investing regularly in one or more inexpensive, broad-market index funds. Learn more about index funds and investing in general at fool.com and morningstar.com.