One of the main reasons to avoid market timing is that it’s incredibly difficult to predict when the market will rise or fall. Even the most experienced analysts and economists cannot predict market movements. By trying to time the market, you’re essentially trying to predict the unpredictable, and success is improbable.
As an example, we assume three investors make annual lump-sum equity investments of $10,000 each year over 20 years. The first, let’s call him Always Right, times the market perfectly every year and buys at the market low. The second, Always Wrong, has terrible timing and invests at the market high for the year, every year. The third investor, Always Consistent, makes his investment on the last trading day of December, every year, like clockwork.
20-year rolling annualized return of lump-sum investments on the year’s low (Always Right), high (Always Wrong) or December 31 of each year (Always Consistent)
We looked at the historical outcomes of each investor on a 20-year basis from 1962 to 1982 and roll forward for every 20-year period ending 2022. The best 20-year period fell between 1979 and 1999. Yet the annualized difference in return between Always Right and Always Wrong was only 3.1%.
Looking at Always Consistent, he fell roughly in the middle. More importantly, the likelihood of timing the investment on the best trading day in a year is 1/250. To try and execute this perfectly for 20 years is a near impossibility — just as it is to have the worst timing every year.
Another point to consider is that trying to time the market can lead to emotional biases, such as fear of missing out (FOMO) or fear of losing money (FOLM), which can cause you to make irrational decisions.
Consistently investing in the market — either monthly or quarterly, regardless of the current price — can help you avoid these emotional biases and ensure a steady investment outcome.
This strategy may not be as exciting as trying to time the market, but it’s been proven to be the most effective way to grow your wealth over the long-term.
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