Share:
Focus on Time in the Market, Not Market Timing
Rate this article: Thank you for rating this article.

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 best 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
1985-2014 1995-2014 2005-2014
[1] Untouched $25,109 $6,548 $2,094
[2] Miss 10 Top-Performing Months $9,650 $2,796 $998
[3] Miss 20 Top-Performing Months $4,563 $1,436 $639

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 1985, 1995, and 2005, ending December 31, 2014.

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®, Wealth Management Systems Inc. For the period from January 1, 1985, through December 31, 2014. Stocks are represented by the S&P 500 index. It is not possible to invest directly in an index and index results do not reflect the costs and taxes associated with actual investments.

© 2015, Wealth Management Systems Inc. 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 are enough to help ensure that the investments you select will 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 advisor 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 advisor can help you determine which investments may be right for you.

Rate this article: Thank you for rating this article.

Asset allocation, diversification and rebalancing does not ensure a profit or protect against a loss.

© 2016 DST Systems, Inc. Reproduction in whole or in part prohibited, except by permission. All rights reserved. Not responsible for any errors or omissions.

This material is authored by DST Systems, Inc. and was not authored by Merrill Edge. Assumptions, opinions and estimates constitute judgment from DST Systems, Inc. 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 suitable for your particular circumstances and, if necessary, seek professional advice. Any opinions expressed herein are given in good faith, are subject to change without notice, and are only correct as of the stated date of their issue.

Because of the possibility of human or mechanical error by DST Systems, Inc. or its sources, neither DST Systems, Inc. nor its sources guarantees the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. In no event shall DST Systems, Inc. be liable for any indirect, special or consequential damages in connection with subscriber's or others' use of the content.

Banking products are provided by Bank of America, N.A. and affiliated banks. Members FDIC and wholly owned subsidiaries of Bank of America Corporation.

Neither Merrill Lynch nor any of its affiliates or financial advisors provide legal, tax or accounting advice. You should consult your legal and/or tax advisors before making any financial decisions.

AR9CFRJT