Focus on time in the market, not market timing
Sports commentators often predict the big winners at the start of a season, only to see their forecasts fade away as their chosen teams lose. Similarly, market timers often try to predict big wins in the investment markets, only to be disappointed by the reality of unexpected turns in performance. It's true that market timing sometimes can appear to be beneficial. But for those who do not wish to subject their money to such a potentially risky strategy, time — not timing — could be the better alternative.
What is market timing?
Market timing is an investing strategy in which the investor tries to identify the best times to be in the market and when to get out. Proponents maintain that successfully forecasting the ebbs and flows of the market can result in higher returns than other strategies. Critics, however, note that changes in a market trend can appear suddenly and almost randomly, making the risk of misjudgment significant.
Market timing has its cost
One of the biggest costs of market timing is being out when the market unexpectedly surges upward, potentially missing some of the best-performing moments. For example, an investor, believing the market would go down, sells off equities and places the money in more conservative investments. While the money is out of stocks, the market instead enjoys a high-performing period. The investor has, therefore, incorrectly timed the market and missed those top months.
The opposite of market timing is buying and holding as the market goes through its cycles. This table illustrates the potential results from poor market timing compared with buying and holding.
The Risk of Missing Out
|
|
1992-2021 |
2002-2021 |
2012-2021 |
| [1] Untouched |
$20,830 |
$6,167 |
$4,626 |
| [2] Miss 10 top-performing months |
$8,244 |
$2,481 |
$2,153 |
| [3] Miss 20 top-performing months |
$3,959 |
$1,295 |
$1,340 |
| Perhaps the most significant risk of market timing is missing out on the market's best-performing cycles. The three columns represent the growth of a $1,000 investment beginning in 1992, 2002, and 2012 and ending December 31, 2021. Row 1 shows the investment if left untouched for the entire period shown above; Row 2 shows the investment if it was pulled out during the 10 top-performing months; and Row 3 shows the investment if it was pulled out during the 20 top-performing months. Source: ChartSource®, DST Retirement Solutions, LLC, an SS&C company. Stocks are represented by Standard & Poor's Composite Index of 500 Stocks, an unmanaged index that is generally considered representative of the U.S. stock market. It is not possible to invest directly in an index. Past performance is not a guarantee of future results. © 2020 SS&C. Reproduction in whole or in part prohibited, except by permission. All rights reserved. Not responsible for any errors or omissions. (CS000078) Past performance is no guarantee of future results. |
Regular evaluations are necessary
Buy and hold, however, doesn't mean ignoring your investments. Remember to give your portfolio regular checkups, as your investment needs will change over time. Many experts say annual reviews may help keep you on track to pursuing your goals.
Time is your ally
Clearly, time can be a better ally than timing. The best approach to your portfolio is to arm yourself with all the necessary information, and then take your questions to a financial professional to help you with the final decision making. Above all, remember that both your long- and short-term investment decisions should be based on your financial needs and your ability to accept the risks that go along with each investment. Your financial professional can help you determine which investments may be right for you.
Asset allocation, diversification and rebalancing do not ensure a profit or protect against a loss.
© SS&C. Reproduction in whole or in part prohibited, except by permission. All rights reserved. Not responsible for any errors or omissions.
The material was authored by a third party, DST Retirement Solutions, LLC, an SS&C company ("SS&C"), not affiliated with Merrill or any of its affiliates and is for information and educational purposes only. The opinions and views expressed do not necessarily reflect the opinions and views of Merrill or any of its affiliates. Any assumptions, opinions and estimates are as of the date of this material and are subject to change without notice. Past performance does not guarantee future results. The information contained in this material does not constitute advice on the tax consequences of making any particular investment decision. This material does not take into account your particular investment objectives, financial situations or needs and is not intended as a recommendation, offer or solicitation for the purchase or sale of any security, financial instrument, or strategy. Before acting on any recommendation in this material, you should consider whether it is in your best interest based on your particular circumstances and, if necessary, seek professional advice.
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