Getting In and Getting Out—The Issue with Market Timing

  • Over a 40 year period, $1,000 became $86,000. If you missed 1% of the days, you ended up with $4,400.
  • A University of Michigan study covering 30 years showed that if you missed 1.2% of the days, you missed 95% of the profits.
  • From December 1991 to December 2001, the S&P 500 went up 12.94%, but if you missed the best five days in 10 years, your return dropped to 10.2%.
  • If you missed the best 40 days in 10 years, your return dropped to -0.56%.

Can you tell me when one of the 40 best days is coming? Timing the market is a two decision process. The first decision, when to get out, is hard enough, but the second decision, when to get back in, comes with its own landmines.

You as an individual investor are constantly bombarded with mixed messages. Consider that on the very same day the Fed chairman sees a recession in the New York Times, the same Fed chairman doesn’t see a recession in the Wall Street Journal. Who do you believe?

When are you going to get out? If you’re referencing the speculation industry, how will you know? Then, you have to make a decision of when to get back in. What will things feel like when you want to get back in? You allowed certain cues to determine when you got out, so you must define the rules of the game to determine when you’ll get back in. But who defines the cues and how do you know the cues actually mean what you think they mean?

Knowing the Right Answer

We’re also familiar with the concept of knowing the right answer versus doing the right thing. We all know the right answer, but it’s not going to make it any easier to do the right thing. So what’s the right thing? Refuse to read the speculation and avoid talking to people who let short-term panic drive their decision making. Keep in mind, if you want to get out of the market that’s fine, but let’s talk about it before you do so, taking into account the weighty evidence of history. Emotion shouldn’t determine your decision.

  • 3 of the 10 best days followed the 10 days following Black Monday in 1987
  • 4 of the top 10 days occurred during the burst of the dot-com bubble, including 2 right as the market was bottoming out and heading back up

It’s darkest right before the dawn, and we don’t ever know when dawn will come, and by the time it registers, you’ve missed one or two of those best days, slicing percentage points off your long-term returns.

More Than Investments

Investing is not about finding the best investments…it’s about becoming the best investor. Best investors see opportunity where everyone else sees danger. Remember the difference between a temporary decline and a loss: if you don’t sell, you’ve had a temporary decline. It may mean months or it may mean years, but it’s temporary. If you do sell, now you have turned a temporary decline in value into a loss. That’s the big distinction.

The biggest purchases most people make in their lives are homes and cars. When it comes to real estate and automobiles, we’re ecstatic when we find something marked down. But when it comes to equities, it’s the opposite of what many investors do. They can’t get enough of equities when they are marked up versus selling when they’re a deal.

The Tuna Example

If you bought a can of tuna fish for $2 one week and it went on sell the next week for $0.50, you wouldn’t return the $2 can for a $0.50 refund. You’d back up the truck and get your supply for the year. Why do we apply a different set of words when it comes to equity investing?

I’ve talked about the four words that trip people up all too often: “This time is different.” It’s not different, just different circumstances. The reality is that the best days will surprise you because they are unexpected. That’s the only assumption that can be made, that the future is like the past.

This requires faith, patience, discipline, and a little optimism.

What If It’s Really Different?

Let’s assume this time it really is different and there’s going to be a meltdown, leading to the end of the world. What would be the appropriate portfolio for the end of the world? Guns and butter? During the last 100 years, what percentage of time did this allocation make sense? None.

Keep in mind that the day that guns and butter becomes the best portfolio, the money is not going to do us any good anyway because we’ll be living in the hills growing in our own food.

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