Consistently and successfully "timing the market" is impossible - no one consistently calls the market's short-term ups and downs. Successful investors are in the market for the long-term - staying the course with a consistent investment program helps you avoid critical market timing mistakes that hurt many investors.
That's the advice that we here from our broker or advisor that uses mutual funds or ETFs. You know the story. The market is crashing and your broker tells you to Hold on in the market.
The Cost of Chasing Performance - 6% per year!
Research shows that individual investors tend to buy after the market has done well and sell after it has done poorly1. One study shows that this poor timing has led to an average of 1.6% lower annual return due to poor timing decisions, a huge cost2.
Most investors are unable to profitably time the market and are left with equity fund returns lower than inflation. Another ongoing study by Lipper and DALBAR, Inc., finds that the underperformance due to timing is much bigger.3
In fact, over the 20 years ending 2007, the average large cap mutual fund investor underperformed by 6% per year his own mutual fund investments!
Why? Buying high and selling low - everyone does it if they don't have a system that curbs the natural human responses to fear and greed.
BerkAdvisory manages money using a disciplined process that attempts to eliminate emotional biases, which allows our clients to stay the course on their long-term plan.
Investors have consistently undeperformed their own funds because of their poor timing behavior.
Is This Buy and Hold?
Dow Jones Industrial Average 1900 - Present Monthly
Staying the course described in your plan does not mean "buy and hold forever" or "buy and forget" investing. It's about making regular investments and adjusting your portfolio as your needs and market prices relative to value change, as opposed to trying to time the market’s short-term ups and downs.
It means periodically reviewing your portfolio and rebalancing it to protect your portfolio from becoming dominated by over-valued stocks.
And it means measuring and monitoring market-based risk so we can put more money in cash or other counter trend investments when the risk of general market decline increases.
