The Risks of Market Timing
“Market timing” is the strategy of trying to predict when stock prices will rise and fall and attempting to buy low and sell high. While this seems to make sense in theory, it’s extremely difficult to pull off successfully. Trying to time the market may mean missing out on potential gains.
Typically, you can’t accurately pinpoint a market high or low point until after it has occurred. If you move your money out of stocks during a low period, you might not move your money back in time. By the time you realize stocks are on an upswing, it may be too late to take advantage of gains.
Instead of trying to time the market, you may be better off with a well-coordinated investment strategy that is based on your personal risk tolerance and time frame. While past performance is no guarantee of future results, the stock market has always recovered from every downturn. Keep in mind that rebounds can sometimes occur quite rapidly.
It’s never clear exactly when the market will recover from a downturn. Investors who move out of stocks at a low point may miss out on a future recovery. Take a look at these historical examples of market rebounds.
S&P 500 Average Annual Total Return
|Year of loss: 1990||-3.1%|
|Following year rebound: 1991||30.5%|
|Year of loss: 2002||-22.1%|
|Following year rebound: 2003||28.7%|
|Year of loss: 2008||-37%|
|Following year rebound: 2009||25.5%|
Sources: Standard and Poor’s and DST Systems, Inc. The S&P 500 is an unmanaged index of the stocks of 500 major corporations. These returns are for illustrative purposes only and don’t reflect the returns of any specific investment or the returns that an investment in stocks may earn in the future. It is not possible to invest directly in an index. Index performance does not reflect the effects of investing costs and taxes. Actual results would vary from benchmarks and would likely have been lower. Past performance is not a guarantee of future results.
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