Financial planner: Successful investing is not about timing the market

Investing is about time in
the market, not market timing.
Graham
Denholm/Getty Images for the VRC

• Successful investing
  isn’t about timing the market,
  it’s about time in the market.
• Financial
  advisor Eric Roberge says he hears frequently from clients
  who fear that the market is going to crash soon, so they would
  prefer to wait to invest their cash. 
• This investing
  strategy might seem reasonable based on the current status
  of the market, however, while it has to crash eventually, it
  could be years before it actually happens. 
• Even if you think
  investing right before a market
  crash is a bad idea, if you’re goal is long-term growth,
  it’s better to be in the market a long time than it is to time
  it. 

Plenty of smart, successful
people with
cash to
invest are currently refusing to invest it.

As a financial advisor, I see
this all the time. I have clients come to me and say, “You know,
I have this cash sitting in my savings account and I know how
important it is to invest so I can take advantage of compound
returns…but the market is going to crash soon, so I’m going to
wait.”

This approach is called ‘timing
the market,’ and it’s one of the fundamental mistakes even
experienced investors make that causes them to miss opportunities
 — or worse, lose money.

The trouble with market
timing

On the surface, this train of
thought seems pretty reasonable based on some basic facts about
the current market:

• It’s been one of the longest
  bull markets in history
• It just keeps going up.
• It can’t go up forever.

A rational decision-making
process would take true facts about the market into
consideration. The problem, however, is when you throw in one
final statement to that list: “It’s going to crash soon.”

This is not a
fact.

The belief or assertion that the
market will crash in the very near future is just that: a belief.
To be more accurate, it’s speculation.

Absolutely no one can predict
what the stock market will do next. It’s worth repeating: anyone
who thinks they can do it is speculating, guessing, or
forecasting.

Yes, the market must crash
eventually… but no one knows exactly when ‘eventually’ is

Again, it’s pretty reasonable to
think “what goes up must come down” when it comes to the stock
market.

You’re right: It will
crash

—
eventually.

It could happen tomorrow, or it
could happen in two years. Maybe it won’t happen for another
five. The point is that we don’t know exactly when, and he fear
that “eventually” means “

tomorrow”

keeps many from taking action. The

aversion to loss

prevents them from simply taking the cash
they have sitting on the sidelines and investing it.

But what if it does take two more
years before we see a market correction? If that’s the case,
these people will just be sitting on cash, and potentially
incurring massive opportunity costs because of two missed years
of potential market growth. When they do buy in, they’ll be
buying at an even bigger peak than they thought they were
avoiding.

This isn’t just a hypothetical
scenario. Just

take a look at this Marketwatch
article

from March
2015. 
It includes
lines like this: “the Crash of 2016, one that promises in the end
to become bigger and badder and far more dangerous than 2008,
1999 and 1929 combined..”

This writer was so confident in a
market crash that he began the article by saying, “It’s time to
start the countdown to the crash of 2016. No, this is not a
prediction of a minor correction. Plan on a 50% crash.”

I don’t know if you can remember
back to 2016, but

the S&P 500 returned
11.9%

that year. Not
exactly what I’d call a crash… and much less a loss of 50% of the
stock market’s value.

And yet today, we still see
articles showing how

58% of investors think the bull
market is on its last legs

and 2018 is the peak.

Those investors could be right —
 or they might end up being as wrong as the doom-and-gloom
forecasters of 2016.

What if you always invested at
the worst possible time?

This is all well and good, you
might say, but what if this is actually the time the speculators
guessed correctly?

That’s a valid fear. After
all,


chance says they have to be right eventually

— the market will go down at some
point.

But even if that happened, even
if you invest your cash today and the market tanks tomorrow, you
are likely better off making that investment than continuing to
sit on the sidelines, and missing out on time in the market — if
your goal is long term growth.

Because that’s what investing
success is really all about: time in
the market. Not market timing.

Don’t believe me? Look at the
case study by Ben Carlson of A Wealth of Common Sense to
see

what actually happens in this
very scenario

:

Meet Bob, the “World’s Worst
Market Timer.” Bob does exactly what you think he would from that
kind of title: he consistently invests at the absolute peak of
the market,

just

before it suffers some of the worst crashes
in its history.

Bob is pretty much your worst
nightmare if you’re sitting on cash thinking “I’ll wait to invest
because I don’t want the market to crash right after I contribute
to my portfolio.”

From 1972 to 2007 he only
invested in the market in the months before major market
crashes:

• in 1972, right before the
  market fell almost 50% in 1973
• in 1987, when it crashed again
  and lost 37%
• right at the end of 1999 just
  in time to see the market lose almost half its value
  again
• in 2007, when the Great
  Recession delivered a 52% loss

Surely, Bob is broke, destitute,
and living in a cardboard box on the side of the road thanks to
his awful decisions about when to invest — right?

You might think so, but you’d be
wrong. Remember: It’s not about market timing. It’s about time in
the market

In this scenario, Bob invested
$184,000 in cash from 1972 to 2007. And what did he end up with
in 2013? $1.1 million.

Eric Roberge is a
certified financial planner.

Photo by Dina
Konovalov

While Bob invested at the

worst

possible times, he never sold any
of his positions. He never pulled his money out of the
market.

Could he have had even more money
if he chose different days to invest? Sure. But the original
scenario set out to answer the question, “what happens if you
invest cash right before every major market crash throughout your
working career?”

In this example, the answer is
you’d still be a millionaire.

(Another look at Bob’s situation,
by the way,

showed what would have happened had he used
dollar cost averaging

instead of trying to time the market. Had Bob
done this with his $184,000, he would have turned it into $4.4
million.)

So rather than worrying about
market timing, focus on


setting up a systematic way to invest money so you make
strategic, rational decisions

, and not falling victim to cognitive and
emotional biases that cause you to make silly investment
choices.

Worrying about investing right
before a market peak is a valid concern — and it’s also
distracting you from what really matters. It’s far more important
to find systems and processes to help you manage your own
behavior so you can invest with greater success.

Eric Roberge is a certified
financial planner and the founder ofBeyond Your
Hammock.