Perils of Market Timing

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Perils of Market Timing

Perils of Market Timing

Investors who flee the stock market for the safety of cash may experience temporary relief from market volatility. But after leaving stocks, their anxiety may shift to concern over missing a stock market rebound while sitting in cash.

The above performance data offer a recent example of the unpredictability of stocks and the hazard of attempting to avoid losses through market timing. The first graph shows returns for the entire quarter. The second and third graphs show returns over two distinct periods during the quarter—a negative return period from January 1 to March 9, and a subsequent positive return period from March 10 to quarter end. The shaded areas in the bars of the third graph indicate the return excluding March 10, which marked the first day of the rebound. Although returns for the quarter were negative, the rebound substantially reduced the magnitude of losses.

This is the nature of stock investing. Gains typically come in powerful upsurges against a backdrop of discouraging financial and economic news. As the March 2009 rally demonstrated, a surprise rebound may frustrate investors who are waiting for a clear signal to return to the market. Of course, a brief period like this may not signal the start of a new bull market. But recent history does serve as a reminder of how suddenly a major turnaround can begin.

An investor’s job is not to predict bull and bear markets, but to be positioned to capture positive performance when it occurs. This is best achieved by holding a broadly diversified portfolio that reflects one’s risk tolerance and investment time horizon.

Samuel J. Sweitzer
Samuel J. Sweitzer
Founder and President of Anson Analytics, Inc. - an RIA firm specializing in Research Based Investment Management for Corporate Retirement Plans and Private Investors. Sam is a Chartered Financial Analyst (CFA) and currently serves as Anson's Chief Investment Officer. Sam resides in South Metro Atlanta with his wife and two daughters.

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