Wealth Decision #7- Don't Try to Time The Market

Wealth Decisions Podcast Transcript for Wealth Decision #7- Don't Try to Time The Market

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You know, Peter Lynch once said, far more money has been lost by investors trying to anticipate corrections than lost in the corrections themselves.

The idea that a bell rings to signal when to get in or get out of the stock market is simply just not feasible or credible.

I know it's tempting, but trying to time the market is a loser's game.

The old adage is it's not about timing the market, but about time in the market.

In this week's episode, we're gonna be discussing Wealth Decision number seven, don't try to time the market.

Warren Buffett once said, the only value of stock forecasters is to make fortune tellers look good.

The short-term direction of stock prices is really close to random.

It's usually driven by fear and by greed.

It all comes down to human psychology and the relationship between the markets and volatility.

But I can tell you one thing, time in the market beats timing every single time.

If you ever panic and get out of the market because it's going down in value, you'll always find a reason to not get back in.

It's impossible to time the market because you have to be right twice.

You have to get out at the right time near a high and then get back in at the right time near a low.

And most individuals who do get out of the market, they usually get out at a bottom and they wait for it to feel good again before they invest, which usually is after most of the recovery has happened.

In February of 2023, Hartford Mutual Funds put out a report called, Timing the Market is Impossible.

And the report looked at missing the best days in the market from 1993 to 2022 versus staying fully invested.

If you invested 10,000 in 1993 and let that money grow in the S&P 500 without touching it, it would be worth over 158,000 by the end of 2022.

But if you missed the best 10 days, it would be worth less than 73,000, about 54% less.

And if you missed the best 50 days during that period of time, it would be worth less than 27,000, 83% less.

But what's most interesting about the report was when those best 50 days occurred.

The study concluded that 52% of the best 50 days happened during a bear market or a bad market.

26% of the best 50 days happened during the first two months of a bull market, when many don't even think it's a bull market or a good market yet.

And 22% of the best 50 days happened during the rest of the bull market.

So, over 78% of the best days in the market over the past 29 years happened during what are perceived to be the worst of times.

Peter Lynch, who I mentioned in the beginning of this episode, managed a fund called the Fidelity Magellan Fund.

And from 1977 through 1990, he had an average annual return of 29%.

One of the best track records ever in history.

But the interesting thing is many investors that invested in the Magellan Fund ended up losing money.

So, what happened?

Well, the losses can be attributed to inexperienced investors.

Many times people would get excited and buy in at times of growth and panic at times of decline.

Rather than waiting it out and letting Peter Lynch manage that portfolio, they'd allow their emotions to get the best of them and they'd jump ship and sell, only to find themselves at a loss since they bought in high and sold out low based upon emotions and their investing.

Charles Schwab did a great study that looked at different timing scenarios of different types of investors.

So, just imagine this for a moment.

You just received your year-end bonus or some type of income tax refund.

You're not sure whether to invest it now or wait.

I get asked this all the time.

Is it a good time to invest?

I always truly believe the best time to invest is when you have money available.

But the study, what they did is they looked at five different individuals that invested their bonus or their tax return differently.

So let's take a look at these five individuals.

In the Schwab study, they named them some creative names so that you understand who we're talking about.

So what they did is they looked at a 20 year period ending in 2022, investing it in the S&P 500.

And we first started off with Peter Perfect.

Peter Perfect was a perfect market timer.

He had incredible skill and he always invested at the very low of the year.

He had $2,000 to invest and he was able to, every single year, buy the S&P 500 at its low for the year.

Then there was Ashley Action.

She took a simple, consistent approach.

And each year, once she received her cash, she invested her money, her $2,000 in the market on the first trading day of the year.

Then there was Matthew Monthly.

He divided his annual 2000 allotment into 12 equal portions, which he invested at the beginning of each month.

I've talked about this in other episodes.

This is a strategy known as dollar cost averaging.

Then there was Rosie Rotten.

She had the worst possible timing and invested her 2000 each year at the market's peak.

And then finally, Larry Linger.

He left his money in cash.

He put it in treasure bills every year and never really got around to investing in the market at all.

So each of these investors invested $2,000 per year.

They just did it in a little bit different way.

So let's take a look at the results.

The best results belonged to Peter.

He waited and timed his annual investment perfectly.

He accumulated about 138,000 over that period of time of the study.

But the most stunning finding was Ashley.

Ashley just took a consistent approach.

She invested at the beginning of the year and she accumulated about 127,000, only about 10,000 less than Peter Perfect.

Matthew, who did the monthly dollar cost averaging approach, performed nearly as well.

He accumulated about 124,000 at the end of those 20 years.

And then there's Rosie Rotten's results, which actually were very surprising when I first look at this study.

Even though she had poor timing, she was only 15,000 short of Ashley, who had invested at the beginning of each year.

So she accumulated about 115,000.

And then there was Larry Linger, the procrastinator who kept waiting for, you know, better opportunity to buy stocks or just didn't spend the time to think about investing and building his wealth.

He fared worst of all, he only accumulated about 43,000.

His biggest worry was investing at the market high.

And obviously, if he had done that each year, he would have earned far more over that 20 year period.

So this study really illustrates the fact that it doesn't matter when you invest in a particular year.

Every time is a good time to invest.

Obviously, nobody wants to buy at the high and then have another financial crisis come about.

During the financial crisis, a lot of people jokingly said, I have a 201K now, not a 401K, because the markets were down 40 to 50% depending on what you were invested in.

I still believe the best strategy is to invest on a monthly basis, just like you do in your 401K.

Put a set amount away each month in your 401K, your Roth IRA and your taxable account to avoid this whole timing the market situation.

It's time in the market, not timing the market, that counts over the long term.

Some people think that the stock market is a casino, or they think it's gambling, or they think the odds are stacked against them.

There was a 25-year study done by Longboard Asset Management, which looked at 3,000 stocks from 1983 to 2000.

And it showed that the odds are against you for randomly picking stocks.

They looked at the study, 18.5% lost at least 75% of their value.

39% of the stocks lost money during that particular period.

64% of the stocks underperformed the Russell 3000.

And only 25% of the stocks were responsible for all of the market gains.

Very similar to what happened last year, where the top 10 companies in the S&P 500 contributed well over 70% of the returns.

This study shows that if an investor knew nothing at all and just picked stocks at random, they would most likely underperform the index.

It's not surprising considering all the other studies that showed similar results.

If the odds are stacked against you as an individual investor buying individual stocks, what should you do?

Well, the first step would be to invest in a diversified portfolio.

Whether that's buying index funds or ETFs or low-cost mutual funds, building a portfolio that covers all the different areas of the global stock market.

Large-cap value blend and growth, mid-cap value blend and growth, and small-cap as well, merging markets, international.

And everyone's portfolio should be a little different.

It all depends on your stage in life, how soon you want to retire, what your expenses are, and what your goals are.

And from there, you build a financial plan first and then build a portfolio designed to help reach your goals.

But if you are interested in buying individual stocks or building a stock portfolio, as I've mentioned in previous Wealth Decisions Podcast, I do have a process called the prudent process for analyzing the best companies to buy based upon certain metrics.

And there's more information on my website.

If you go to momentouswealthadvisors.com, go to the services tab and then stock investing.

I have a video that talks about the momentous prudent process for picking stocks.

If you don't have enough money or don't think you have enough money to buy individual stocks, you probably should focus first on building a portfolio of low-cost ETFs and mutual funds.

That's it for today's episode, Wealth Decision Number 7, Don't Try to Time the Market.

If you like to schedule a Discovery Call with me, you can go to my website at momentouswealthadvisors.com and I'll spend some time to get to know you a little bit and find out if I might be able to steer you in the right direction or help you with your financial future.

Listen to this episode on Apple Podcasts or Spotify


-Brian D. Muller, AAMS® Founder, Wealth Advisor

Momentous Wealth Advisors in a fee-only fiduciary advisory firm

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