Timing the Market: A Risky Endeavor

Chart of the Week for February 23-March 1, 2001

Timing the market, choosing to be in or out of the market altogether to make a profit or avoid big losses, can significantly reduce returns over the long run.

Investors who attempt to market time make the decision to withdraw their funds based on the mood of the market. Their reasoning goes like this: “The market is down today and it may get worse tomorrow. I’ll be better off withdrawing my funds now and plow them back when things get better—probably next week.” History shows this may be the worst time to get out. Even professional market timers are rarely out of the stock market altogether.

The S&P 500 Index returned 14.9% (on annualized basis) from January 1991 to December 2000 — counting all days— versus only 7.0% if we take out the best 20 days. Being out 1% of days results in a 50% reduction of return. In most cases, the index made those best daily gains after being in negative territory the previous day.

Making investment decisions based on the daily swings of the market can be a risky endeavor, and will probably reduce your returns in the long run.

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