IS MARKET TIMING THE SECRET TO INVESTMENT SUCCESS?
By MARY LYNNE DAHL, CFP®
March 01, 2017
Getting to 21,000 was inevitable and only a matter of time. I am old enough and have been in the financial planning and investment business long enough to remember when the Dow Jones Industrial Average (DJIA) was at 850. Yep, 850. That was when Sir John Templeton shocked the world and predicted that “someday it will hit 10,000”. He did not say when, just “someday”. He was mocked by some and admired by others for his insights into the future. Well, it did hit 10,000 but not without some ups and downs. This pattern of gradual upward growth, with intermittent ups and downs, is normal. Some people who do not understand this pattern of ups, downs and overall growth believe that they should be in or out of the market depending on whether it will go up or down from wherever it is at a specific moment in time.
So, now that the Dow Jones Industrial Average (DJIA) has, indeed, topped 21,000 mark, some investors are pulling out and putting their money into cash, on the sidelines. The theory is that it has reached a high and will now take a major dive downwards. Well, maybe it will and maybe it won’t. Maybe it will be a small drop or maybe it will be a big drop. Nobody knows for absolute certain. However, some people do believe that they have identified the tops and bottoms of market prices. The goal is to sell your shares when they are up and then repurchase them when they are cheaper, at the bottom of the market. This is called “timing” the market. It sounds good and some people will tell you that “market timing” is the secret to investment success. However, it doesn’t work. It is not a valid investment strategy.
Back when the US DJIA hit 18,000 I talked to several people who said that they had gotten out because they were certain that the market had reached the top and they wanted to protect their gains. Their plan was to get back in when the market dropped back down to 17,000.This is a typical strategy for market timing. You, or someone you pay to predict the market, identifies the top and the bottom, a number for getting in and getting out. So, they got out at 18,000. What happened? The market went to 21,000 and they did not participate in it. They are still waiting for it to drop to 17,000 but it may not do that, ever. Or maybe it will. The point is that it cannot be predicted. It is gambling, not investing. Remember, this strategy has been studied to death, over and over, and it has never been proven to work. Once you get out at what you think is the top, you now have the problem of not knowing when you get back in.
A better plan is to have a plan. The plan might include taking some cash out periodically for income or planned purchases, but it should not be based on taking all of the cash out in an effort to time the market.
All investors should recognize that the stock and bond markets, as well as other markets like art or real estate, do have their ups and downs. They do not always move upwards in price and they do not always move downwards in price. Over time, the trend is for growth, largely due to the gradual effect of inflation and growing national economies worldwide. Most nations do not move backwards, although there are a few who do appear to want to head that direction. Most nations, and most people, want to have better lives with a higher standard of living. Most parents want their children to have more opportunities and better choices than they had. Technology keeps being developed and innovations keep improving that technology. Nothing stays the same for very long.
So, stock markets are constantly in flux but they do have a long history of growth, over long periods of time. Knowing that, serious investors do not gamble. They decide on the goals for their investment dollars and a plan to reach those goals. The plan is flexible, so that changes can be made if warranted, but they do stick to the plan. They do not dump it to jump in and out of the markets in a futile effort to pinpoint tops and bottoms of a cycle. They stay in for the long run and stay mostly invested continuously. They take out cash for income and planned purchases, generally as part of the original or modified plan.
If someone tells you that it’s time to get out, be sure to ask them when to get back in. Ask for a specific number. You probably won’t get it, but if you do, be quick about
Instead of gambling on trying to time the market, just get a plan, get in and stick with the plan. It sounds simple and it is, but most people don’t do it. Why? Because it takes discipline, a characteristic in short supply these days. Get disciplined and join the ranks of smart, successful investors who already know that market timing is a poor strategy for investment success. Discipline, not market timing, is the real secret to investing success.
©2017 Mary Lynne Dahl, CFP® is a Certified Financial Planner ™ and partner in Otter Creek Partners, a fee-only registered investment advisor firm in Ketchikan, Alaska. These articles are generic in nature, are accepted general guidelines for investment or financial planning and are for educational purposes only.
Mary Lynne Dahl©2017
Mary Lynn Dahl can be reached at firstname.lastname@example.org
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