Market Timing….Luck or Skill?

Investors continue to market time. This attempt to get out of the market when it is going down and get back in when it will go up is futile. Dalbar Research is an independent think tank that studies investor behavior.

Dalbar’s annual study of investor behavior shows that self-directed investors work against themselves largely by chasing the market

Barclays Global Investors headquarters on Howa...
Barclays Global Investors headquarters on Howard Street in San Francisco, California. (Photo credit: Wikipedia)

Investors are their own worst enemy, or so is the conclusion of Dalbar’s 22nd annual Quantitative Analysis of Investor Behavior study that compared equity fund returns of directed investments versus the market benchmark. This year’s study found that in 2015, investors returns came in at -2.28% for equity funds while the S&P 500 benchmark had incremental gains of 1.38%, thus the average equity investor underperformed the S&P 500 by 3.66 percentage points. The good news is that’s better than 2014, in which investors left 8.19 percentage points on the table.

The bad behavior wasn’t limited to equity funds, Dalbar found.

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The selling point of all market timers is that they will get out of the market during down markets and buy on the way up.

This is an admirable goal however the Dalbar study illustrates that no one succeeds in the long term. Even those with illustrious credentials and diligently study the market patterns cannot beat the market rate of return in the long term.

NO ONE can predict the equity markets for the long term.  Those that do pick the market tops and bottoms are the relying on luck and not skill.

After the 2008-9 investors were and still are looking to avoid repeating any pain. These investors are getting out of the equity markets all together, a huge mistake. Volatility and risk are part of the reason the equity markets experience a return premium over the long term. Without this volatility your return would be much lower and you will be unsuccessful in keeping up with inflation. In other words the purchasing power of your money will not be maintained.

This is what I call the invisible loss.

Another group of investors is seeking out those analysts/advisers who avoided the down turn. Thus avoiding pain for the investor. The problem is that these analysts/advisers are unable to repeat their success over the long term as illustrated by the above article.

If investors are seeking to reduce their investing anxiety and improve long term results they need a prudent strategy and discipline. These investors will be unable to do this on their own. Therefore, the need for an investor coach is greater now than ever.

Reaching your long term financial goals cannot be accomplished alone.

Your emotions will not allow it.

Stop looking for the next great investment class or fund manager. Their ability to repeat is near zero. There are three simple rules of successful investing:

Find a coach who will help follow these rules and you will reach your long term financial goals.

When you do find your coach listen to them. It has been said that advising investors not to market time is like advising fish not to school together. It would be against human nature not to market time because ‘this time is different’.