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Finding a Solution for Poor Investment Timing

Finding a Solution for Poor Investment Timing

October 10, 2023

Making the wrong moves in the investment world can be financially damaging. If you reacted to last year's market downturn with a "fight or flight" response and pulled back your investments, you might be pondering when it's the right time to re-enter the market. You're not alone in this; many investors sought refuge in cash-like assets during that time, resulting in record-high holding in money market funds.i Unfortunately for those who sold, the market has already rebounded significantly, with the S&P 500 gaining 24% from October 12, 2022, to September 1, 2023.ii

The challenge lies in the fact that investor behavior often lags behind market movements. While the stock market typically acts as a leading indicator, moving ahead of other economic indicators, investors tend to be slow in their reactions. This mismatch in timing can lead to poor investment decisions. 

A Bitter but Effective Remedy

Thankfully, there is a remedy for this problem, although it may not be to everyone's liking. We recommend that investors remain in the market, even if it means holding their noses, closing their eyes, and facing their fears head-on. Historical market data consistently shows that pulling out of the market, particularly near its lows, often results in missing out on the best days.

As you can see from the chart below, if you had missed the ten best trading days over the past two decades leading up to December 31, 2022, your returns would have been nearly halved, dropping from a projected 9.8% if you stayed fully invested to just 5.6% if you missed those ten days. The reason for this significant impact is that seven of those ten best days occurred within two weeks of the worst days, with six of them happening right after the market's lowest point.

Source: - 9/2/23

Investors Who Fled

If you succumbed to your fight or flight instincts and chose to exit the market, you might be wondering when it's the right time to re-enter. Despite missing out on the market surge that has already occurred this year, we believe the answer is clear, and it's "now." We base this on two key reasons:

Reason 1: Basic Economics

When sidelined investors re-enter the market, their increased demand can drive prices significantly higher. This is a fundamental principle of economics: when demand rises while supply remains constant, prices tend to increase. In this context, the influx of cash into the market can be expected to drive up securities prices.

Reason 2: Time in the Market vs. Timing the Market

Regardless of when you decide to enter the market, historical evidence suggests that staying invested over time generally yields better results than trying to time market movements perfectly. While there are occasional individuals who achieve impeccable timing, most investors find it challenging to do so consistently.

Consider a five-year example in the U.S. stock market that included a down market (2018), a global pandemic and a sharp market decline (2020), followed by a steep recovery (late 2020 through 2021), and another significant decline (2022). Even amid such volatility, investing early and staying invested proved to be the most rewarding strategy.

Avoid Becoming a Victim of Poor Timing

Instances of poor timing are plentiful in financial history. For instance, in September 2008, Smart Money magazine encouraged readers to invest in stocks, funds, and real estate, just as the stock market collapsed by approximately 30%. Similarly, Silverstein Properties purchased a 99-year lease on the World Trade Center in July 2001, just two months before the tragic events of 9/11.iii

While these examples may not be directly comparable to your investment timing decisions, they underscore a common lesson: the future is uncertain, and attempting to time the market perfectly is often a futile endeavor. That's why we recommend adhering to your wealth plan, even during challenging market conditions. If you did sell and have cash on hand, reevaluate your wealth plan to ensure an appropriate level of risk and sufficient liquidity to cover expenses in case of market setbacks.

As always, we’re here to be your trusted advisors helping you reach your goals and stay on track with your financial plans.


[i] - 9/2/23
[ii] Yahoo finance data, October 12, 2022 – 9/1/23
[iii] – 9/1/23