The Dow, which serves as a proxy of the stock market overall, just set a new nominal record today. Obviously, the market will do this often over time (assuming it always continued to go up over the long-run). However, each time that it reaches a higher after being significantly below that, it tends to make headlines.
When the market is reaching a new high, people typically have one of two reactions:
1. Wow, the stock market sure has risen a lot. Maybe it’s time that I sell some of my stocks to capture my gains.
2. The stock market sure has been climbing! Maybe I should change my allocation to give a heavier weighting to stocks to take advantage of the climb.
It’s natural to have these reactions. Every time the media reports on a new high or low I think “Should I buy? Should I sell?” But then I settle down and realize that there’s absolutely nothing that I need to do. The portfolio allocation that worked yesterday will work today. Let’s briefly look at why it’s difficult to time the market and why it typically doesn’t work out.
- If market professionals aren’t able to time the market, then why do you think you can? Each time you buy a stock, someone else is selling. With the volume traded by professionals, chances are high that the person on the other end of the transaction is a professional who dedicates all of his time to following the market.
- The returns of the market are attributed to just a handful of the total days. In one study, the 100 best days out of the previous 100 years accounted for more than 99% of the returns in the market.
- You have to be right…twice. Not only do you have to change your allocation at the correct moment the first time, but you have to switch it back at the right time later. That’s placing a lot of confidence in your timing abilities.
But don’t just listen to me. Check out how some of the greatest investors feel about trying to time the market.
Our stay-put behavior reflects our view that the stock market serves as a relocation center at which money is moved from the active to the patient. – Warren Buffett
Whenever some analyst seems to know what he’s talking about, remember that pigs will fly before he’ll ever release a full list of his past forecasts, including the bloopers. – Jason Zweig
Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves. – Peter Lynch
Only liars manage to always be out during bad times and in during good times. – Bernard Baruch
Do you know what investing for the long run but listening to market news everyday is like? It’s like a man walking up a big hill with a yo-yo and keeping his eyes fixed on the yo-yo instead of the hill. – Alan Abelson
Do your future a favor and stay put. Sure the market may decline 15% this year. It might rise 20%. Or it might finish flat. Nobody knows. But 10,000 pundits will make predictions and some % will be right. And next year, when they’re on TV, they’ll talk about how they were right in 2013, which is of course why you need to listen to them now. No thanks. I’ll stick to the allocation that I determined based on my needed returns and willingness to accept risk. Hopefully you’ll choose to do the same.