Trying to Time the Market is Rarely Rewarded

By Randy Burge, Managing Director, Investments
Provided by Russell Investment Group
Global Leaders in Multi-Manager Investing

Timing buy or sell decisions in the stock or bond markets is generally considered ill-advised as few investors get it right consistently. But sometimes you end up doing it. After all, any investment decision, in effect, involves assessing market levels.

When you receive new money to invest, for example, you need to decide when and how you are going to invest it. Do you wait until the market falls so that you receive more for your money? How do you determine when it has fallen enough? And that the trend won't continue?

Similarly, when you need to withdraw money from the market, and you have flexibility in which to do so, you might be tempted to watch the market to try to determine when it is at a high point so that you lock in the greatest gain.

Also, most investors will adjust their portfolios as they move closer to retirement. Do they try to time a market peak or trough to do so?

In all cases — whatever your decision — you are, in effect, implicitly timing the market.

We suggest, however, that you resist any temptation to do so.

Russell has studied investment managers for 35 years and we have not found anyone who can effectively get market timing right more than once or perhaps twice.

Our studies of the ups and downs of the market and the inability of anyone to effectively time the market leads us to this conclusion: The way to decide when to buy and sell investments is to do so on the basis of your needs, not based on what the market is doing.

If you have investable dollars and decide to invest into the market, do not try to time a market bottom as you are unlikely to succeed. After all, some of the best investment minds regularly get it wrong.

The same principle applies to selling your investments. Do so when you need the money not when you think the market is right.

Similarly, if your lifestyle changes or you need to adjust your portfolio because you are moving closer to retirement, do so regardless of market conditions.

History — and Russell research — has shown that you should stay invested according to the mix you have decided is appropriate based on your risk tolerance and investment needs, whether that is 60% stocks and 40% bonds or 80% stocks and 20% bonds.

You may benefit from regularly rebalancing investments to maintain your selected asset allocation. But do so because the proportion of the investments changes, not because of any market timing decisions.

Think of adjusting your investments as taking your car regularly for servicing. You do so to make sure your car is running well rather than waiting for something to go wrong.