What should you know?
Trying to time the market is a trap that self-directed investors can commonly fall into.
It sounds simple enough, sell right before markets start to fall and buy again just before they start to rise.
Alas, the evidence clearly shows that accurately and consistently timing the markets is impossible for both novice and ‘expert’ investors alike.
Moreover, the costs of trying to time the market can be huge.
The chart below shows the impact of missing only the 10, 20 and 30 best days in the S & P 500 over the past 20 years, compared with staying fully invested throughout:
If an “active” investor had missed only the 10 best days in the market, they would have lost out on nearly 50% of the returns the market generated for wise and patient investors.
Why should you care?
Over the past 20 years, 7 of the 10 best days happened when the market was in a temporary downturn, which is exactly when many investors choose to leave the market in search of ‘safety’.
In addition, many of the best days took place shortly after the worst days.
Moving in and out of markets, trying to time the correct point of exit and entry, is a dangerous game that is highly unlikely to be successful in the long term.
Getting your timing wrong and missing as few as 10 days during a 20 year period can make an enormous difference to your investment outcome.
Remaining invested throughout is the only sure way to benefit from all the gains that the market has to offer.
