The Difficulty of Timing the Stock Market

October 13, 2016 | ,

Since markets hit their 2016 troughs back in February, they have continued to rally and hit new all-time highs over the course of this year. With the upcoming election, talks and discussions surrounding a market bubble and looming recession, investors have begun to ask themselves if now is the right time to start lowering their equity market allocations to better position and protect themselves.

Of course, reducing equity exposure in anticipation of a market downturn requires close to perfect timing on the front end — reducing equity exposure — and on the back end — renewing equity exposure. The cost of getting this timing wrong can be dramatic, especially if some of the days on the sidelines end up being some of the strongest days of market returns on record — which is especially true on the days coming out of a correction. Our chart above illustrates the dramatic shortfall which can emerge if investors are out of the market on notably high returning days in the market. Clearly, despite the inherent volatility of the stock market, it is better to be fully invested in the market than trying to time the market in anticipation of market corrections and subsequent recoveries.

Note: Returns calculated using daily price returns of the S&P 500 Index over the past 50 years, for the period ending September 30, 2016.