A recent question-and-answer article from Money Magazine illustrates the problem with timing the market. While making money in the stock market is as “simple” as buying low and selling high, emotional reactions to the market often prevent that from being a feasible strategy. The question comes from an individual close to retirement, Heidi. She lost several thousand dollars of value in her 401(k) and reacted by selling her equities and keeping the cash in her retirement account.
By the time you lose a good portion of your investment — Heidi doesn’t specify the percentage of loss she experienced — it’s too late. It’s common and expected to sell in a panic, scared to lose more value. A market downturn and quarterly statement after quarterly statement with decreasing bottom lines turn someone who thought they were immune to market swings, a risk taken to increase the chance of higher returns, into a conservative investor. And the reaction comes at the long time.
Invariably, people now scared of the stock market will wait for “positive signs” before diving back into the pool. One such positive sign is a sustained market rebound. But once again, if you wait and react to the positive rebound, you’ve missed the chance to earn the best returns — the kind that drive the statistics that claim the stock market retuns 8% over the very long term. If you are not in the stock market when the market rebounds, and wait until the rest of the world starts buying stocks again, you won’t experience the increase that makes the stock market famous.
With this in mind, it’s better not to try to time the market and react to short-term market conditions. Stay invested, but maintain (and rebalance) an asset allocation that makes sense for your future financial needs. If you need your money to last another three decades, even if you’re starting retiremement and expect to live longer, you may need the boost that the stock market can provide over those 30 years, but it doesn’t hurt to keep a portion of your portfolio — what you will need in the first ten years of retirement, for example — in something less risky.
I’m not a financial adviser, and these thoughts are just based on my observations.
The trouble with market timing, Walter Updegrave, Money Magazine, May 7, 2009.