Individual Investor

The Trouble With Timing

As tempting as it is to try to outguess the market, it's a loser's game

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Trying to escape before the market dives is often more costly than letting investments ride.

Timing may be everything, but for investors it has its limits. The goal of market timing is to catch market upswings and dodge downturns. It's an investment approach that bases decisions about when to buy and sell securities on predictions about where the market is headed. But trying to escape before the market dives is often more costly than letting investments ride, says Stephanie Giroux, TD AMERITRADE's Chief Investment Strategist. Investors are often too late to sell and also miss the bottom when they try to get back in — and missing a market rebound can be worse than weathering a dip. "Research has shown that outperformance tends to happen during a limited number of days," Giroux says. FactSet data published by Ibbotson Associates show that $10,000 invested in a typical Standard & Poor's 500-stock index fund in 1980 would have grown to $286,000 if left alone through 2006. But if you happened to miss the top 10 days in that period, you'd have ended up with just $131,000.

The object of market timing is to be out of the market on its worst days, not its best. But that's tough to accomplish consistently. "And it requires you to watch the market constantly," Giroux says. Even if you do well with this approach, transaction fees and taxes on capital gains can substantially undercut your returns.

Instead, pursue a balanced, diversified approach across and within the major asset classes: equities, fixed income and cash. During times of heightened volatility, Giroux says, you might consider boosting your cash holdings temporarily, but typically not to more than roughly 10% of your portfolio. "You have to fight your fear of the market," she adds, "and stay fully invested even when things seem uncertain."
— Jennifer Pellet