3 Reasons Why Market Timing is a Lie


A few days ago, CNBC ran a story on Bob, "the world's worst market timer." In the scenario, Bob made his first investment in 1973, right before a nearly 50% crash. Then a second investment in September 1987, right before another 34% crash. Followed by a third and forth investment in 2000 and 2007, respectively. So after 42 years of misfortune, how did the "world's worst market timer" perform? 

He had an annualized return of nearly 9%. The key was that Bob never sold his holdings, and instead relied on capitalism to carry his savings higher.

I wanted to look into this story further and see what else we could learn from Bob.

1. Liquidity is key.

We've preached to clients for years that the key to being successful in the long-run has to do with staying invested. In fact, here's a chart that we often show in client meetings showing the impact of jumping in and out of the market.


Just missing the top 25 days in a 45-year period lowers your return by over 400%! And, those 25 days probably came during the scariest, most volatile times.

So having a proper asset allocation so that you're able to withstand market fluctuations without trying to time the market is key because it lets you stay invested and liquid. If he would have needed that money for something else, it would have gone terribly.

2. Inaction is still action.

Many people don't invest because they think the market is on the brink of collapse. And while they're sometimes right, the overall effect is devastating on a portfolio. 

Like Bob, consider the story of Sad Suzy, who invested $2,000 a year for 20 years between 1993 and 2012. The only difference is that Suzy invested her $2,000 each year on the highest day of the year. While Suzy is not only willing to invest in the market, she's also very unfortunate to pick the worst day each year to begin investing. Now, contrast her to Scared Sam, who keeps all of his money in cash because he's either afraid of a market crash or waiting for the 'next big thing.' 

Over that 20 year period, Sad Suzy with her terrible market timing will still end up with nearly $72,500, which represents a nearly 50% higher return than Scared Sam, who will have about $51,300 in his portfolio.

3. The fallacy of being perfect.

Now, consider two other people Perfect Paul and Immediate Ida. Perfect Paul takes his $2,000 a year and invests it at the lowest point of the year for 20 years. That means Paul is able to perfectly time markets to the month for 20 years - an impossible task. On the other hand, Ida invests her $2,000 as soon as she gets it. This means that Ida will invest in January of every year, while Paul may wait until August, if that's the lowest month of the year, and this means that Paul should earn a superior return to Ida at almost every turn.

Well, after 20 years, you find that Paul's portfolio comes out to $87,000 while Ida's is at $81,650. So Paul's portfolio outperformed Ida's by about 7% after 20 years of being able to predict the future. Personally, we don't find this $5,000 out-performance to be all that impressive.

The lesson we took from this? Unless you know the future, you should just invest your money into the stock market whenever you can, and not only will you bypass a lot of the emotional stress of the market, you'll achieve a similar return to someone with nearly-perfect timing. 

What did we learn?

The quote about "just showing up is 90% of the job" is true in investing too. While it would be ideal to have a crystal ball, you can avoid all of the emotional turmoil of market timing by just investing regularly. For us, we love to see our client's succeed, and we see this most often when they make regular contributions into their investment accounts.

This concept is often referred to as 'dollar cost averaging,' which we've talked about before. Short of that, investing immediately is a great solution for most investors. The key is to work with a good financial advisor that understands your liquidity needs and your time horizon for investing.