The Folly of Market Timing
If you want to make money in the stock market, you have to be in—all the time.

Market timing for fun and profit! Now that sounds good, right? Who wouldn’t want to have fun while making a profit? In the investment world, that’s the siren song of the market timer. They ask the obvious question, “Why would you want to invest in the market when it’s going down?” Of course no one would.
As a consequence, there is an overwhelming temptation to follow the guru who promises to help you avoid bear markets by trying to ride market updrafts and avoid drops. That approach of beating the market is an overwhelming temptation for many investors.
A simple analysis of market history would show that if you called the market correctly every year you’d be rich. If you were correct in calling the market even half the time, your return wouldn’t be too bad, either. Given those odds, why wouldn’t you give market timing a shot?

Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
The problem is that, as in many cases, simple statistics can be very misleading—like the stories of the man who drowned in a lake with an average depth of 3 feet, or the man who thought he’d be comfortable with his head in an oven and his rear in the refrigerator.
Assuming returns based on the concept of flipping a coin can be very misleading. What matters is the actual annual sequence of returns. Remember, a market timer has to be right twice – when to get out AND when to get back in. Consider the following example:
The timer correctly called the bull markets in years 1 and 2 but missed the first bad market in year 3. He then redeemed himself by calling the serious bear markets in years 4 and 5, avoiding a 35% loss. Unfortunately, while waiting for confirmation that the market had turned, he missed the dramatic bull markets in years 6 and 7 (remember, you have to decide when to get back in as well as when to get out). The result: Patient investor, 4.6% annual return; Timer, 3.9%.
How likely is it that this will happen to a market timer? Over time, it’s just about guaranteed. Consider the grand recession. From November ‘07 to March ‘09, the market fell 46.7%. The subsequent one-year return was 53.6%!
Still not convinced? If I asked you to name the top 10 artists of all time or the top 10 baseball players or the top 10 presidents, we’d all have our own list and happily debate our choices. Now, let me ask you, name the top 10 market timers of all time? Having trouble? How about the top 5? Still stuck? How about the top 1? I’m sure you’re still having trouble.
My point is, if anyone had successfully timed the market over an extended period of time we would know his or her name as they would be one of the richest people in the world. The fact that we don’t know any names should be a warning sign not to chase the illusion of market timing.
Research has shown that when you factor in transaction costs you would have to be correct almost 70% of the time. And that assumes instantaneous switching from stock to cash and back. The real world doesn't work that way. If you factor in a time delay for switching to look for a market “confirmation,” you would have to be correct almost all of the time to beat the buy-and-manage alternative.
The moral? If you want to make money in the market, you have to be in the market – all of the time.
Harold Evensky, CFP is Chairman of Evensky & Katz, a fee-only wealth management firm and Professor of Practice at Texas Tech University. He holds degrees from Cornell University. Evensky served on the national IAFP Board, Chair of the TIAA-CREF Institute Advisor Board, Chair of the CFP Board of Governors and the International CFP Council. Evensky is author of The New Wealth Management and co-editor of The Investment Think Tank and Retirement Income Redesigned.
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more. Delivered daily. Enter your email in the box and click Sign Me Up.

Harold Evensky, CFP® is Chairman of Evensky & Katz, a fee-only investment advisory firm and Professor of Practice in the Personal Financial Planning Department at Texas Tech University. Evensky served as Chair of the TIAA-CREF Institute Advisor Board, Chair of the CFP Board of Governors and the International CFP Council. He is on the advisory board of the Journal of Retirement Planning and is the Research Columnist for Journal of Financial Planning. Evensky is co-author of The New Wealth Management and co-editor of The Investment Think Tank and Retirement Income Redesigned. Mr. Evensky has received numerous awards over the years. The most recent is Investment Advisor Magazine, 2015 IA 35 for 35 recognizing the advisor advocates, investors, politicians and thought leaders have stood out over the past 35 years and will influence financial services for decades to come. Don Phillips of Morningstar called Mr. Evensky the dean of financial planning in America.
-
Don’t Miss Apple and Walmart Back-to-School Tax-Free Holiday Savings this Summer
Sales Tax Select states host sales tax holidays during the summer; here’s what you can purchase.
-
The Rule of Retirement Inversion
The rule of retirement inversion says that to have a great retirement, you must ask yourself what would ruin a great retirement — and then plan to avoid it.
-
How Divorced Retirees Can Maximize Their Social Security Benefits: A Case Study
Susan discovered several years after she filed for Social Security that she is eligible to receive benefits based on her ex-spouse's earnings record. This case study explains how her new benefits are calculated and what her steps are to claim some of the money she missed.
-
From Piggy Banks to Portfolios: A Financial Planner's Guide to Talking to Your Kids About Money at Every Age
From toddlers to young adults, all kids can benefit from open conversations with their parents about spending and saving. Here's what to talk about — and when.
-
I'm an Investment Pro: Here's How Alternatives Could Inject Stability and Growth Into Your Portfolio
Alternative investments can often avoid the impact of volatility, counterbalancing the ups and downs of stocks and bonds during times of market stress.
-
A Financial Planner's Guide to Unlocking the Power of a 529 Plan
529 plans are still the gold standard for saving for college, especially for affluent families, though they are most effective when combined with other financial tools for a comprehensive strategy.
-
An Investment Strategist Takes a Practical Look at Alternative Investments
Alternatives can play an important role in a portfolio by offering different exposures and goals, but investors should carefully consider their complexity, costs, taxes and liquidity. Here's an alts primer.
-
Ready to Retire? Your Five-Year Business Exit Strategy
If you're a business owner looking to sell and retire, it can take years to complete the process. Use this five-year timeline to prepare and stay on track.
-
How the Stock Market Performed in the First 6 Months of Trump's Second Term
Six months after President Donald Trump's inauguration, take a look at how the stock market has performed.
-
A Financial Planner's Prescription for the Headache of Multiple Retirement Accounts
Having a bunch of retirement accounts can cause unnecessary complications. Consolidation can make it easier to manage your savings and potentially improve investment outcomes.