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The Madness of Market Timing

An occasional question we get from clients when markets are doing well, as they have been in the past few years, is “should we take some profits now, so we can be well positioned when the markets fall next?”

 The short answer: No.

 This is a normal impulse to react to something that does not require a reaction. If you sell some of your assets, either the markets will go up (as they do 3 years out of 4) or they will decline. If they decline, you need to determine when you think they have gone down enough for you to get back in. If they go up, you will have lost out on the gain and then have to pay higher prices to get back in.  Markets cannot be timed, especially because you need to time it right twice – getting out and getting back in.

We are certainly going to have a correction at some point, as markets do fall (an average of 30% every 5 years since WWII, with an intra-year average decline of 14% since 1980). This should not be a concern for the long-term, disciplined, patient, goal-focused investor. This advice isn’t different if you are saving for retirement or already retired. You need your nest egg to last the rest of your life, and you need it to keep pace with the rising cost of living over that time.

The best time to invest is now, because markets cannot be timed. If you receive a significant lump sum (for example, an inheritance) that you are uncomfortable investing all at once, you can always invest it in equal monthly amounts over some time period (such as 6 months or a year). This way of investing your money is likely to not be as effective as investing it all at once, but it does avoid a short-term impact from the market dropping dramatically shortly after you invest it all.

The good news is that you don’t need to time the market.Simply invest the money you don’t need right away in a low-cost, diversified set of mutual funds, and let the market’s eventual rise over time produce a reasonable return on your investment.

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