Why Market Timing Never Works

Don’t try to time the market. Don’t chase performance. How many times have you heard those admonitions? Not enough, apparently. Data recently released by research firm Morningstar once again demonstrated that as investors we’re still committing the same mistakes. And the results are ugly. “Investors are not the best market timers,” says Alina Lamy, Morningstar’s senior quantitative analyst. “In fact they are pretty horrible market timers.” Following the stock market swoon of the Great Recession, many people bailed out of stocks and into fixed income, missing years worth of outstanding stock market returns. The S&P is up more than 250% since its recessionary bottom.

Last year, too, turned out to be a decent one for the stock market. But investors, freaked by Brexit, the U.S. election and global anxiety generally, began to parachute into fixed income funds. They sought to lower their risk profile and perhaps latch on to what has been a bull market in bonds. According to Morningstar, in 2016 investors shifted $412 billion shifted into bond mutual funds and ETFs last year. They did this even as bond prices were falling, which happens when interest rates rise. In the last two months of the year, many bond funds took a hit while stocks surged.

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This year, weekly money flows into stock and bond mutual funds and ETFs have been particularly volatile, a reflection of what’s going on in Washington D.C. Optimists have been driven by President Trump’s plan to overhaul regulation, spend on infrastructure and lower taxes, driving the stock market to new highs—and making it relatively pricey. But if politics poleaxes any of those plans, the air could come out of equities. “It’s almost become trite now, in the market, that there’s a lot of uncertainty,” noted Goldman Sachs CEO Lloyd Blankfein in a recent post. If uncertainty is going to be a certainty, trying to time the market makes even less sense that it ever did.