The Tough Part about Market Timing

We all know the feeling. The stock market is in a downward spiral and you, as an astute investor, feel like you “must do something”.

That “something” all too often means pulling your money out of the stock market and going do a “safe haven” such as cash. And that always feels comforting.

There is only one problem. It’s probably not the right move. Getting out of the market is the easy part. It’s getting back into the market at the right time that proves to be somewhat problematic for nearly every investor who tries to time the market.

Every time the market gets scary, I’ll receive one or two phone calls from clients that don’t know me very well yet asking if they should move their investments out of the stock market and into cash.

My response is always the same. That would only make sense if they’re willing to get back into the market when the market is scarier than it is today.

In other words, invest back into the market when it’s lower than it is now. Remember, in order to make money in the market you need to buy low and sell high.

Sounds easy, however, our emotions tell us to do just the opposite. When stocks are low, because the market has been declining, we should be buying. But our emotions get the better of us and force us to sell at precisely the wrong time. And when stocks are high, which is when we should be selling, the typical investor is piling more money into the stock market at a faster rate than when the market was down. Again, it is our emotions that get us into trouble with our investment decisions.

According to a recent Dalbar study over the past 30 years, the S&P 500 (an unmanaged index of 500 Blue-Chip stocks) has average 11.11 percent per year. Not bad.

But when you look at individual investors and how they have managed their portfolios, we find that the average investor has only earned 3.69 percent per year for the same 30 year time frame.

I blame most of that discrepancy on the emotions of individual investors and what those emotions make them do, which is buy high and sell low. It’s a recipe for portfolio disaster.

So what’s the solution? Fewer transactions and periodic rebalancing. You need to have an investment plan in place in order to successfully manage your portfolio. And just as important, you need to stick to that plan.

Many investors need help in this area. I find that one of my most important functions as a financial planner is to help my clients control their emotions so that they do not sabotage their own portfolios.

After spending a number of years in the CPA business, I entered the financial planning profession in the mid-1980s. One of the first seminars I attended featured a speaker who talked about his mother’s portfolio.

It turns out that his mother owned quite a few shares of AT&T that she acquired back when the company was young. She had totally forgotten that she owned the stocks, which were in her safe deposit box at the bank. When the stocks were discovered in her safe deposit box, it turns out their value was well over $1,000,000.

The speaker was quite certain that if his mother had known that she owned the AT&T stock, there would have been many occasions where she would have wanted to sell because of some negative news about AT&T.

But because there were never any selling transactions, the stock was allowed to grow over time to the benefit of the investor. The speaker referred to this as investment management through blind neglect.

While blind neglect is probably not the safest way to manage your investments, there is something to be learned here.

I think the bottom line and the take away from this article would be that it’s more important to have time in the market than it is to try to time the market.

If you find that your emotions get the better of you, find a financial planner that you trust who can help you navigate through the various market cycles while keeping your emotions in check.

Terrance R. Gaertner, CPA and CFP, MS is president of Chicago Financial Advisors. He is a member of The Financial Planning Association. He has earned a Master of Science degree in Financial Services with a concentration in Retirement Planning. You can reach him at 847-825-9700 or 900 South Knight Avenue, Park Ride, IL 60068.