The Two Biggest Mistakes Investors Make – Part 2
Trying to Time Market Highs and Lows is Recipe for Failure
By Tom Kirk, CPA-PFS, president and Founder, FirstWave Financial
Over 90% of investors do not capture the returns that the market provides. Why is this? The two biggest reasons are concentrated investing and attempting to time the markets. This blog post addresses the problems with market timing.
Market timing refers to the attempt to be invested in the stock market when it is going up and out of the market when it is going down. Wouldn’t that be great? Of course it would, but it is virtually impossible to do so consistently.
If you are trying to do this on your own, it is too easy to let your emotions get the best of you and, while attempting to protect your money this way, you are actually putting it at increased risk. That’s because you will wait until everything looks good before you buy and be encouraged by your emotions to sell after the market reverses. As a result you are usually late – late to participate in the rally on the way up and late to get out on the way back down. The result can be that you buy high and sell low, over and over again. Have you ever heard someone say, “Whenever I invest in stocks the market always immediately goes down”? This is often the reason why.
What about professional timing services? How often does a market-timing guru need to be right to beat an index? Nobel Laureate William Sharp concluded that a market timer must be accurate 74% of the time in order to outperform a passive portfolio at a comparable level of risk.
What percentage of self-proclaimed market-timing gurus get it right? CXO Advisory Group graded 28 well-know market-timing gurus who made a collective 4,629 forecasts from 2000-2012. The study showed that not one of the self-proclaimed gurus was able to beat Sharpe’s requirement of 74% accuracy, thereby failing to deliver accuracy sufficient to beat a simple index portfolio.
A better approach is to design an investment plan that is based upon your need for return, your attitude toward risk and your timeframe for investing. A portfolio invested this way is much more likely to perform in a manner that will allow you to let the capital markets work for you and avoid the counter-productive measures taken by so many others. Contact us today to schedule your complimentary consultation with one of our WealthCoaches.
About the Author: Thomas L. Kirk
CPA-PFS President, Founder and WealthCoachTM
- Certified Public Accountant
- Personal Financial Specialist
- Financial Planning Association Member
- University of Florida, BSBA