As you have probably noticed, October has not been a good month for the stock market. As of Wednesday’s close, the Nasdaq is down 12 percent from its high this year, and the S&P 500 is off 9 percent. During big swings like this, some people start to think they should try to time the market.
But market timing is a dangerous game as Stephen Dart suggested in a recent blog. Keeping your money invested historically produces better long-term results than exiting and entering at what you think are the right times.
Warren Buffet often says he can’t tell you which way the stock market will move in the short term. If Warren Buffet can’t time the market, it doesn’t bode well for the rest of us. Economist William Sharpe has said a market timer’s choices would need to be right 74 percent of the time in order to beat someone who simply stayed in the S&P 500. Do you have that much faith in your market-timing ability?
Few of us do. Still, staying the course while your investment portfolio declines can be scary. I remember conversations I had towards the end of 2008 with clients who wanted to get out of the stock market completely. Fortunately, I was able to talk almost all of them off the ledge and keep them invested. They recouped most of their losses the following year.
Ironically, some of those clients were the same people I had to talk out of selling their lower-earning (but safe) bonds to buy high-flying stocks near the market top in 2007.
Greed and fear are normal human emotions, but if you don’t exercise control, they can hurt you. In the long run, getting out of the market and missing the gains will hurt your portfolio more than staying invested and riding through the down days.
Of course, keeping your money in the market doesn’t mean you shouldn’t make any changes. You should always start by creating the right diversified investment mix based on your and objectives and your portfolio. But you do need to adjust the mix periodically to keep the balance of risk and reward in line with your goals.
For more information on the subject, check out this U.S. News & World Report article on market timing.