Thinking of Timing the Market? Think Again.

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Volatility is back. The sustained rally that produced 30%+ gains in the S&P 500 in 2019 and continued into 2020 came to an abrupt halt in late February, when fears of the new coronavirus epidemic and its effects on the economy swept Wall Street and beyond. Markets across the globe plummeted, and the Dow Jones Industrial Average dropped over 1,000 points in one day. More drops followed, and volatility has ensued as investors try to grapple with the spreading epidemic and its potential impact on trade, travel, and the global economy.

The Futility of Market Timing

The situation presents a tempting scenario for would-be market timers — those who try to predict when stock prices will rise and fall. Should you sell before it gets worse? Should you buy while prices are down? What about parking your money in bonds until the epidemic runs its course?

While timing your purchases and sales to capitalize on the market’s ups and downs may seem to make sense in theory, it’s extremely difficult to pull off successfully. Typically, you can’t accurately pinpoint a market high or low point until after it has occurred. If you move your money out of stocks during a low period, you might not move your money back in time. By the time you realize stocks are on an upswing, it may be too late to take advantage of gains.

In fact, history has shown that trying to time the market’s ups and down is a loser’s game. Even the experts, with their analytical prowess and sophisticated computer models, cannot manage to consistently beat the market. A landmark study by CXO Advisory Group tracked more than 4,500 forecasts by 28 self-described market timers between 2000 and 2012. Only 10 were able to accurately forecast equity returns (as measured by the S&P 500) over 50% of the time, and none were able to predict accurately enough to outperform the market. Nobel Laureate William Sharpe calculated a market timer would have to be correct 74% of the time — on both the market decline and recovery — to outperform another investor who just lets their money sit in a passive portfolio of comparable risk.

Dealing with crises such as the coronavirus epidemic requires patience and a level head. Here are some suggestions to help you weather the storm:

  • Don’t panic. Selling into a plunging market is often a sure way to lock in a loss. Talk with a financial advisor before you act. He or she can help you separate emotionally driven decisions from those based on your goals, time horizon, and risk tolerance. Researchers in the field of behavioral finance have found that emotions often lead investors to read too much into recent events even though those events may not reflect long-term realities. With the aid of a financial professional, you can sort through these distinctions, and you’ll likely find that if your investment strategy made sense before the crisis, it will still make sense afterward.
  • Consider Time in Market Instead. Clearly, time can be a better ally than timing. Instead of trying to time the market, you may be better off with a well-coordinated investment strategy based on your personal risk tolerance and time frame. While past performance is no guarantee of future results, the stock market has always recovered from every downturn.

So think twice before trying to time the market’s dips and corrections, and work with your financial advisor to ensure that the investments you select are in keeping with your goals.

 

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Michele Bjorkgren, Financial Advisor
Compass Financial
p. 515.327.1020 x13
e. michele.bjorkgren@compassiowa.com
Securities Offered through LPL Financial
Member FINRA/SIPC

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A little more about us:
Compass Financial is an independent, fee-based financial advisory firm in West Des Moines, Iowa. The Compass Team helps individuals and families develop an inspiring vision of their financial future and a realistic strategy.

By listening closely to our clients’ true needs, wants, hopes, desires and dreams we are able to combine Wealth Management and broad Financial Planning customized to each individual situation. It’s our goal to assist you in developing a personalized financial road map. The results from the process should include confidence that comes from planning. As we all know, life happens, sometimes ambushing the best laid plans. Accepting a new reality and adapting the financial plan is work we have done many times for our clients.

We also offer Financial Check Up or Second Opinion Services to those who want to enhance the service they are already receiving. This should lead to a better understanding of your current plans and give added confidence to your existing advisor relationship.

Sometimes life’s biggest challenges come in the form of transitions, retirement, marriage, health issues, divorce, unexpected loss, or even college savings. Our team at Compass has experienced many of these life transitions, it’s our hope to come alongside you and your family. These defining moments of life provide opportunities to implement financial strategies that can have long lasting impact. The first step is always the most difficult, but can also be the most rewarding. Please Contact Us today to receive your free, no obligation, one hour initial consultation!

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