One of the most destructive investor habits, the prediction addiction, must be avoided at all costs by everyday investors. Yet, much of the daily financial news and stock market reporting is based on short-term thinking. This provides the media with something to talk about. After all, what would there be to talk about if investors only invested for the long term? Their constant negativity can affect even long-term investors by placing doubt about the efficacy of their portfolio choices.
For example, Derek Foster, one of Canada’s youngest retirees, accomplished that goal by investing primarily in conservative dividend-paying stocks. He admitted that during the market crash of 2008, he capitulated and sold some of his stocks! Seeing the folly of his ways, he bought back in shortly thereafter. This underscores the need for most investors to hire “a captain of the ship” to navigate the rough waters. This alone can more than compensate investors for any fees charged by an independent wealth advisor.
Stock market junkies, on the other hand, are actually gambling addicts that constantly get in and out of the markets. These orphan investors feel that they have the knowledge and ability to predict the future movements of a particular stock, or stocks, and the direction of the stock markets on a consistent basis.
The prediction addiction is fuelled by several factors, including those who sell get-rich-quick schemes, so-called experts who promise they have the next big solution to becoming rich, and purveyors of so-called newsletters promising to provide you with the “next big stock pick” if you buy their newsletters. In addition, there are advertisements pushing and pumping everything from gold, cryptocurrencies, commodities, funds, and software programs.
In my decades of experience, I have never come across anyone who could consistently time the markets, yet I have heard from several people how they made money timing the market. While Lady Luck can shine from time to time, typically market timers lose their gains by attempting to duplicate any success they have had. The notion that everyday investors can collect enough data to predict the winning companies and sectors at the right price at the right time is simply wishful thinking.
Furthermore, market timers have to go up against the pros and their super computers and algorithms, which process millions of trades in seconds. This means that investors have to find opportunities and execute their trades, which is humanly impossible to do in nano seconds.
In addition, attempting to time the markets is even more difficult because products such as ETFs rebalance their portfolios daily. This creates a very high level of trading volume, thus more market volatility.
The history of the stock markets clearly shows that market timing doesn’t work. For example, the chart below shows how an investor would have fared market timing versus staying put, taking into consideration a $10,000 investment in the US S&P 500 index between January 4, 2009, and December 31, 2018. Staying put would have grown the investment to $27,775 an almost tripling of their money, earning an average annual rate of return of 10.75 percent.
In contrast, if the investor missed only the best thirty trading days in twenty years, their initial $10,000 investment would have lost $820! Had the investor missed just ten of the best trading days in twenty years, their $10,000 investment would have grown to $17,220, or $10,000 less than an investor who remained invested.2
Original investment: $10,000
Remain invested the full time: $29,845
Missed 10 best trading days:$14,895
Missed 20 best trading days: $ 9,359
Missed 30 best trading days:$ 6,213
Missed 40 best trading days: $ 4,241
Therefore, it’s clear that time in the markets, and not market timing, is a major determinant in creating meaningful wealth and a lifetime retirement income.
ABOUT THE AUTHOR
ROBERT F. ROBY, author of WEALTH SIMPLIFIED, is the owner of a successful wealth-management practice in Canada. He has been fully securities licensed for more than thirty-two years and has guided numerous clients to achieve their financial and retirement objectives. He has also been the recipient of numerous industry accolades, including being selected as an Industry Icon by Wealth Professional in 2016.