Timing the Market
As briefly mentioned twice earlier, it is tempting, when looking at the ups and downs of the market, to try to time the business cycle so that you buy stocks after a crash when they are cheap, and then sell them after a long bull run, when they are much more expensive.
It sounds like a great idea, doesn’t it? Like surfing: wait for a perfect wave that is about to break, and off you go!
Unfortunately, countless studies show that it doesn’t work.[i] Even professionals generally fail to pull it off. Yes, we know the market goes up and down, but we don’t know when. For example, in 2016 everyone knew that the ten-year bull run was getting long in the tooth, everything looked overpriced, and that a downturn must come soon. It looked a lot like the top of the market. Yet in 2019, the market was even higher. If you thought you’d be clever and sell everything in 2016 to skip the inevitable crash, you would have missed out on all that growth.
Similarly, it is hard to pick the bottom of the market. When the stock market crashed in 2008, smart people knew that it would be a good buying opportunity and a terrible time to sell. However, (a) had they saved up a pile of cash specifically for that moment over the last five years, they would have missed out on that five years of growth that had just passed, and (b) they would not know exactly when the market had reached the bottom anyway. They might invest greedily once the market is down 20%, only to see their painstakingly saved wealth suddenly plummet another 20%. In the industry, this is called “trying to catch the falling knife.”
If you happen to have some spare cash for long term investments burning a hole in your pocket and suddenly the stock market crashes, fine, go ahead and pour it into your shares index fund if you want to. If stocks are high and you need to move out of the market anyway, feel free. But don’t make this your strategy. Only do it if it would make sense anyway, given your broader financial goals. For the most part, ignore what the market is doing and stick to your own plan. And if that plan is the one suggested – making regular investments of your savings over a long period of time – you’ll do fine in the long run. Much better than you would by trying to be sneaky and time the market.
I know, it’s like finding out there’s no Santa Claus. Sorry I was the one who had to tell you.
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