Timing the market: navigating changes from Wall Street

As Warren Buffet, American businessman, investor, and CEO of Berkshire Hathaway, once said, “We continue to make more money when snoring than when active.”

He said this in regards to investors trying to utilize a market timing strategy, or making decisions about buying or selling assets based on their own predictions of future market price movements. Many active investment managers are constantly attempting to predict drastic corrections in the market, whether that be through the analysis of previous market fluctuations, through the advice of their peers, or simply through a “gut feeling” about it.

Regardless, studies have shown that most investors don’t exactly do a good job at predicting future market fluctuations.

According to Forbes, the average investor has actually made more than 200 basis points less of profit on investments by jumping in and out of specific equities over the last decade versus the returns enjoyed by the investment managers who simply bought and held their clients’ stocks. Equity Funds investors, according to Forbes, performed even worse, seeing returns last year that were, on average, 450 basis points worse than the return on the S&P 500. This strategy has clearly been largely unsuccessful for a lot of investors, but the question remains of why another strategy may be more profitable.

Why Market Timing Isn’t Such a Good Idea

Many investors attempt to follow the famous adage “buy low, sell high.”

While attempting to predict large corrections in the market, lots of investors will be putting so much money into accounts and taking so much money out that they don’t realize how much they’re losing with all of these transactions. This is what can happen when investors base their decisions off of in-the-moment “gut feelings” about where the market is headed rather than sticking to a much more consistent method. Staying committed to a long-term strategy of reliable investments and asset class diversification helps to reduce the risk of putting clients’ assets in harm’s way.

When it comes down to it, most investment managers are simply not very good at accurately forecasting the market. According to Howard Marks of Oaktree Capital Management, a renowned billionaire and investor, the average expert forecaster was off by about 15% when
attempting to predict the level of long rates in six months. If even the most experienced of investors can be that inaccurate regarding predictions six months from now, imagine how much money a novice investor could lose while attempting to predict market behavior five years out.

This vast misunderstanding isn’t entirely the investor’s fault: watching one investor hit a stroke of luck and join the rich and famous through their market timing “strategy” is a tempting path to follow. However, although that one investor saw extremely profitable results, there is no guarantee that the average investor will be nearly as profitable.

In general, fluctuations in the market aren’t very likely to recur, and wise investors will realize that very few people are actually going to “beat the market.” Those who do have likely done so out of sheer luck rather than sound investment management strategy. As Marks reiterates, the old adage of “it’s difficult to make predictions, especially with regards to the future” generally holds true in the investment management and financial planning industry.

What to Do at the Top of the Market

At this point, you may be thinking, “Ok, so trying to time the market clearly doesn’t work. What strategies can I use to get as much as possible out of my investments?” We’re glad you asked. At M3 Wealth Advisors, we believe in adhering to a long-term asset allocation and diversification strategy that will help your assets grow during booming markets and attempt to curb any harm to them during recessions.

Some alternatives to market timing with potentially higher probabilities of success include:

  • Diversification beyond domestic equities and into other asset classes, such as bonds and foreign equities
  • Focus on asset allocations and their associated risk
  • Minimizing taxes and unnecessary investment management fees
  • Rebalancing as needed, and no more than needed

How We Can Help

At M3, we have realistic expectations about your investments. We recognize that attempting to time the market is an incredibly risky game, and we won’t play games with your assets.

We focus on determining the appropriate amount of risk involved in your asset allocation and long-term financial plan up-front, rather than attempting to adjust your portfolio with the market at a later time. If you’re looking into a more passive investment management strategy or are just wondering how we look into different asset allocation options, check out our financial insight tool below: