Why Attempting To “Time the Market” is a Difficult Strategy
By Nikki Young, CFP®, Financial Advisor
Market timing is an investment strategy in which investors move in and out of the markets to try to avoid losses before they happen and then buy back in at the bottom after the market has crashed. Buying low or selling high is a prudent strategy for most investors. However, buying lowest or selling highest — or trying to time the market perfectly — is an elusive strategy, one that is difficult to execute and may lead to lower returns and missed opportunities.
To be successful at market timing requires you to know two things: 1) exactly when to pull your money out of the market and 2) exactly when to put your money back into the market. The reality is that no one has ever been able to do this consistently. Market tops and bottoms are impossible to predict, and a large percentage of market gains tend to come immediately following major bottoms.
For example, during the pandemic of March 2020, the Dow Jones lost 37% of its value, however, it quickly rebounded and by year end the Dow Jones was up an astonishing 43.7%!
One strategy to avoid the urge of market timing is to have a properly diversified portfolio. Diversification is a strategy that mixes a wide variety of investments within a portfolio. The idea is that at any given time some investments will be winners, and some will be losers. Being well-diversified can reduce risk, because it’s less likely that one investment will derail your entire portfolio.
Ultimately, the risk and fluctuation of the market is unavoidable. The only way to ensure you capture all the upside is to remain committed to riding out all the temporary downsides. The beauty of investing is that long term, the equity market trend is certain: Over a 20-year period, stocks have generated positive returns 100% of the time. This presents an opportunity to gain real financial independence and multigenerational wealth by simply remaining disciplined and resilient to market fluctuations.
Accepting the reality of market volatility is easier said than done. Partnering with a qualified professional can help you manage your investments, avoid the temptation of market timing and put the financial noise in perspective. It’s “time in the market,” not “timing the market” that is the primary driver of investing success.
If you need advice on investment management, I’m available to meet with you virtually, in our Herndon main office or our One Loudoun office. Email me at firstname.lastname@example.org or visit my website, nyoung.nwfllc.com to schedule a complimentary, no-obligation consultation.