Why Timing is NOT Everything

As we all know, the old phrase “timing is everything” seems to capture the seemingly random, but impactful, chance events which occur throughout life.  Of course these sometimes life-changing events can be either negative or positive.  The examples are innumerable and we all have them:

  • You have to stop for gas on your drive to work and find out you miss a 10-car accident by 2 minutes
  • You run into an old friend, get invited to a cookout the next weekend and end up meeting a future business partner
  • Your son is studying in Italy and runs into a girl from grade school who ends up being your daughter-in-law

We could all rattle off an odd set of circumstances which ended up profoundly impacting us and can be perceived in any number of different ways, depending on one’s belief system.  One person might think their situation was a result of divine providence, another- mathematical chance, still another- a mystic power in the universe or another- just dumb luck.  Regardless of the belief system, it’s almost universally perceived that “timing is everything”.

While that may help rationalize things for us in everyday life, we believe applying this mind-set to investing is at best unprofitable and at worst, downright hazardous to your financial health.  market timing image

Why? Because the financial markets are so unpredictable, it’s almost impossible to accurately time the market in a consistently profitable way.

With the stock market touching new record highs the last few weeks, we seem to be getting more and more questions about whether or not it makes sense to continue investing “at these levels”.  Our immediate question is: “When will you need to use this money?”  We certainly can’t provide appropriate advice without knowing the answer to that question as we always consider each family’s individual circumstances.

But taking it a step further, history suggests missing just a few days of market moves can have dramatic effects on a family’s portfolio.  In fact, a recent study by JP Morgan Bank shows just how volatile markets can be and how for example, missing just 10 of the best trading DAYS out of 20 YEARS of investing would have nearly cut your return in half!  Even more importantly, the study points out that “six of the 10 best days occurred within two weeks of the 10 worst days” (see accompanying chart), which means when things looked their darkest, those that remained invested usually recovered and made healthy profits.  Keep in mind, the typical year has about 252 trading days so 20 years of trading days is over 5,000 days!

market timing graph

Source: J.P. Morgan Asset Management analysis using data from Morningstar Direct

Now those percentages and the dollars shown in the chart may not be too compelling, but what if we applied this using $500,000 instead of $10,000?

The math is certainly the same but the difference in dollars all of a sudden becomes life changing.  Starting with $500,000 and making 8.18% (compounded annually) results in about $2.41 million after 20 years.   If instead, someone missed the 10 best days over the 20 year time period and earned only 4.49% (compounded annually), they would only have $1.2 million – JUST HALF!

Would starting your retirement with an extra $1.2 million would matter to you and your family?

The point is this: investing is critically important to retirement and achieving many other life goals.  But we believe diverse asset allocation, consistent re-balancing and keeping investing expenses low are the key strategies to employ – NOT market timing.

Too often, families are “sold” on the idea that some market wizard has a crystal ball and can predict the future.  But the fact is, no one knows the future.  And as demonstrated by missing 10 days out of 5,000 trading days, timing is certainly NOT everything.

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