After enduring two bear markets in the last decade, investors are trying to time the market more than ever before. Trying to catch the recovery by jumping in and out of stocks has become a popular daytime sport.
As tempting as it might be to chase performance, individual investors should avoid this sport. We've found that timing the market is a futile effort. It sounds easy enough: Buy when stocks are rising, and sell when the market is falling. The problem is, market movements are extremely hard to predict. And by the time you decide to pull the trigger to buy or sell, things have already moved.
When stocks tumbled in 2000 and 2008, plenty of investors got scared and sold. People typically sell during the most painful time when the market is dropping—and that usually marks the bottom. When investors make a decision to get out of the market, they must later decide when to jump back in. They'll say: "I'll wait for the right time to get back in." Here's where it gets tricky. If the stocks go up right after investors sell, they're not going to want to pay more than what they sold them for. So the "right time" doesn't come. What ends up happening is that they never get back in to the market. Or they determine that they don't want to miss any more gains, so they end up buying at the top.
Either way, investors won't make any money. That's why it's so important to establish an investment plan using asset allocation, which is simply spreading your money among different types of investments that fit your tolerance for risk. The beauty of asset allocation is that it provides enough protection when the markets fall and healthy gains when the market rises. When you're diversified among different types of stocks and bonds, you don't have to worry when one sector goes out of favor for a little while. If you set your investment plan and understand that stocks and bonds can fall for periods of time, you'll have the discipline to stick with your investment choices and not make emotional decisions, especially during downturns.
Discipline (and staying calm) is one of the secrets to successful investing. On the other hand, market timing taps into people's desire for fast results for many things in life. Rather than sitting in a restaurant and enjoying high-quality food, people order a meal from their car and drive to a window to pick it up. Some people take an advertised weight-loss pill to slim down instead of working out at the gym or going for a walk. Sure, we all want results right now. But in reality, investments are one of those things that take a long time. If you're patient and disciplined, your investments will be rewarding down the road.
So here's my advice: Don't make emotional decisions about your money and stick with your financial plan. Try to tune out the daily mutterings about the market's ups and downs and "hot" stock picks. Although it's nice to be able to monitor your investment accounts online, don't check them every day. This will help you avoid making bad decisions. If you have the right mix of stocks, bonds, and cash, and have confidence in your plan, you can weather any market and be okay.
Adam Bold is the founder of The Mutual Fund Store, which provides fee-only investment advice with locations coast-to-coast. He's also host of The Mutual Fund Show, a call-in radio program broadcast across the country. Bold is author of the book The Bold Truth about Investing (April, 2009). Bold is Chief Investment Officer of The Mutual Fund Research Center, an SEC registered investment adviser which provides mutual fund and asset allocation recommendations and research to stores in The Mutual Fund Store system.