Investing 101

Why timing the market is a loser’s game

By Bonnie Conrad

When you invest your money in the stock market, it is only natural to want to avoid bear market declines. After all, bear markets can take the value of stocks down 50 percent or more over the course of several years, a disconcerting drop to say the least. As a result, many investors try to time their investments, hoping to get in at the bottom of a bear market and jump out at the top of the next bull run. 

If only investing were that easy. If finding the top of a bull market and identifying the nadir of the next bear were that easy, every investor would be a millionaire, and there would be no reason for anyone to hold down a real job. The reality is that trying to time the market is a loser’s game – one that individual investors play at their peril.

If you doubt the folly of trying to time the market, just consider the miserable track record of managed mutual funds and the highly paid fund managers who pick their stocks. Over the long term, almost 90 percent of those managed funds fail to outperform plain vanilla index funds, which simply buy all the stocks in a given index and hold them forever. 

When you consider that some of these money managers are paid millions of dollars by mutual fund families, and ultimately by the buyers of those funds, it is easy to see just how difficult it is to be right when trying to time the market. Keep in mind that in order to truly time the stock market and make a lot of money, you need to be right twice – once when stocks are riding high and everyone is a buyer, and again when stocks are at their lowest and no one wants to invest. Being right half the time simply will not cut it – and all too few professionals are able to get it right.

Fortunately, there is a way for ordinary investors to avoid the folly of timing the market and increase their odds of beating the pros in the long run. By simply dollar cost averaging into a quality index fund month after month, savvy investors can accumulate a greater number of shares during those bear markets, and fewer when the market is riding high. It might not be timing the market, but dollar cost averaging is a great way to accumulate significant stock market gains in the long run.

Dollar-cost averaging also has another important benefit, in that it instills fiscal discipline on the investor. By setting up a bank transfer every month, investors force themselves to save and live on less than what they earn, instilling a level of fiscal discipline that will serve them well – no matter what the stock market does in the short term.