Market Timing

Behaviors to Avoid

Buy low, sell high. We have all heard this mantra of investing. The problem, of course, is that it is very hard to determine when a stock or the market is high or low. For a stock on the rise, what seems high in comparison to its past price may just be a pause in the steady climb to newer highs. On the downside, what seems like the bottom may be a short-term pause in a long disastrous plummet.

When investors begin to think that they can predict the bottom or top of a movement in the market and act accordingly, they are engaging in market timing. Very few investors are successful at this and this behavior frequently contributes to significantly reduced returns. A study by DALBAR, Inc. found that the average equity investor earned 2.57% annually over the last 19 years. In contrast the S&P 500 Index earned 12.22% annually during the same period of time. The cause of these diminished returns by investors is behavior. “Motivated by fear and greed, investors pour money into the equity funds on market upswings and are quick to sell on downturns. Most investors are unable to profitably time the market and are left with equity fund returns lower than inflation.”

The key to avoiding market timing is to clearly understand both the risk you are taking and the length of time you will be invested before developing your investment strategy.