Perspective Matters
For many years we have seen volatility in equity markets be relatively muted. In recent weeks, we have seen many days with moves of more than 1%, so it seems like a good idea to revisit why we refer to trading in markets like these as “trying to catch a falling knife.”
In the pursuit of investment success, many may be tempted by the allure of market timing—the strategy of moving in and out of the market to capture gains and avoid losses. The premise seems logical: buy low, sell high, and sidestep the painful downturns. Yet decades of financial research and real-world experience reveal that successful market timing is not just difficult—it's nearly impossible, even for professionals. Today I want to remind you why market timing is dangerous to your financial health and why patient, disciplined investing typically yields better results.
THE HIGH COST OF MISSING THE MARKET'S BEST DAYS
Perhaps the most compelling evidence against market timing comes from analyzing what happens when investors miss the market's best days. These powerful upswings often occur unpredictably, sometimes during periods of high volatility or directly following significant downturns.
According to J.P. Morgan's analysis of S&P 500 returns from January 1, 1980, to December 31, 2020:
An investor who remained fully invested would have earned an annualized return of approximately 9.2%.
Missing just the 10 best days would have reduced returns to 5.4%.
Missing the 20 best days would have further lowered returns to 3.0%.
Missing the 30 best days would have resulted in a mere 1.1% return.
In dollar terms, a $10,000 investment in 1980 would have grown to approximately $780,000 if fully invested. Missing the 10 best days would have reduced that to about $230,000—a staggering difference of $550,000.
What makes this particularly treacherous is the timing of these best days. Research has consistently shown that many of the market's strongest days occur within two weeks of its worst days. Investors who flee during downturns often miss the critical rebounds that follow, permanently impairing their returns.
LONG-TERM RETURNS: THE POWER OF PATIENCE
I have long argued that time and cash are your most critical risk management tools. Ensuring you have enough cash set aside to ride out market volatility over a 2 – 3-year period should be your first step in securing your financial future and hopefully help manage your temptation to sell when market volatility increases.
Let’s look at some of the data showing the benefits of staying invested; examining rolling period returns offers further evidence against market timing. Historical data (since 1925) from the S&P 500 (and its predecessor indices) reveals:
Rolling 5-Year Periods
Positive returns in approximately 86% of all rolling 5-year periods
Average annualized return: 10.2%
Median annualized return: 11.1%
Rolling 10-Year Periods
Positive returns in approximately 94% of all rolling 10-year periods
Average annualized return: 10.5%
Median annualized return: 10.3%
Rolling 15-Year Periods
Positive returns in approximately 99% of all rolling 15-year periods
Average annualized return: 10.4%
Median annualized return: 10.6%
Rolling 20-Year Periods
Positive returns in 100% of all rolling 20-year periods
Average annualized return: 10.9%
Median annualized return: 11.1%
The data reveals a critical insight: the longer the investment horizon, the higher the probability of positive returns. Every single 20-year period in market history has delivered positive returns for disciplined investors, regardless of their starting point.
Another observation from this data – notice the consistency of the average annualized returns. Over the last century, the S&P 500 average annualized returns for 5, 10, 15 and 20 year periods ranged from 10.2% - 10.9%. The lesson here is that if we see returns much higher or lower than those numbers for a year or two, or even three, we should consider the increased likelihood that returns in subsequent years will be in the other direction in order to get back towards these historical averages. What we don’t know is when that direction will change.
WHY TIMING FAILS: THE BEHAVIORAL SCIENCE
Market timing requires being right twice—deciding when to exit and when to re-enter. This doubles the chance for error. The challenge is compounded by several psychological factors:
Loss Aversion: Humans experience the pain of losses roughly twice as intensely as the pleasure of equivalent gains. This asymmetry leads investors to flee markets during downturns, precisely when staying invested or adding to positions would be most advantageous.
Confirmation Bias: Once investors exit the market, they tend to seek information confirming their decision was correct. This often delays re-entry until well after the recovery has begun.
Overconfidence: Despite overwhelming evidence against its effectiveness, many investors believe they can successfully time the market. This overconfidence leads to excessive trading and underperformance.
The lesson here? There are actually two. First, our emotions can lead us to do exactly the wrong thing at exactly the wrong time. Second, even when we think we are being rational, we may not be as objective as we think we are. One way to offset these psychological factors is to write down why you make a particular investment decision, and when you are tempted to make a change, re-read what you wrote. Have the reasons you made the investment decision changed? When the answer is “yes” it may be time to make a change, but if the answer is “no” the best action may be no action.
THE BETTER ALTERNATIVE: TIME IN THE MARKET, NOT TIMING THE MARKET
Rather than attempting to time the market, investors would be better served by:
Strategic Asset Allocation: Develop a diversified portfolio aligned with your risk tolerance, time horizon, and financial goals. This allocation should be designed to weather market cycles, not attempt to predict them. Keep in mind that having enough cash set aside to cover whatever you expect to need to spend for the next 2 – 3 years can help you focus on the broader market cycle.
Dollar-Cost Averaging: Invest systematically regardless of market conditions. This disciplined approach ensures you're buying more shares when prices are low and fewer when prices are high. Who doesn’t like a sale?
Periodic Rebalancing: Instead of market timing, use disciplined rebalancing to maintain your target allocation. This creates a systematic "buy low, sell high" approach without attempting to predict market movements.
PULLING IT TOGETHER: THE VIRTUE OF PATIENCE
The evidence is clear: attempting to time the market is likely to harm rather than help your investment returns. The most reliable path to long-term investment success isn't cleverly jumping in and out of markets—it's building a well-designed portfolio and giving it time to work through market cycles.
As Warren Buffett famously advised: "The stock market is a device for transferring money from the impatient to the patient." In investing, patience isn't just a virtue—it's the primary determinant of success.
Rather than trying to avoid the market's worst days (and risking missing its best days in the process), investors would do well to remember that time in the market, not timing the market, is what builds wealth. The data has spoken clearly on this matter—those who listen will likely find their financial futures far more secure.
WHAT TO DO NOW
We are seeing an increase in market volatility largely due to an increase in economic uncertainty. The Trump administration has sent a clear message that Americans should expect continued uncertainty as it seeks to implement its vision across American society and the economy. History tells us that this is a good time to review your investment goals and ensure your portfolio is aligned with them, but it is not a time to take dramatic steps based on predictions of what could or might happen.
Monitoring changes in the labor market, consumer behavior and interest rates can help us understand where we are in the economic cycle, but that doesn’t mean upending your investment strategy. My team and I understand your concerns about the future, and we'll continue providing updates as significant trends emerge that could affect your investment strategies and financial planning decisions.
If you're not currently working with a Certified Financial Planner™ professional, this period of change makes it an excellent time to consider doing so. Our role as CFP® professionals is to help you navigate uncertainty while staying focused on your long-term financial goals. We continuously monitor fundamental investment and planning principles while considering global economic contexts. If you'd like to discuss how these changes might affect your specific situation, I'm available for personalized consultations. Together, we can explore strategies to help protect and grow your wealth in these challenging times.
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Neither Prism Planning and Solutions Group nor Insight Advisors provide tax advice, and nothing in this communication should be treated as such. This communication should not be interpreted as a recommendation for a specific investment or tax-planning strategy. We are providing this material for informational purposes only. We have made every attempt to verify that information contained in this communication is accurate as of the date published but make no warranties. Before making any decisions related to your own tax and/or investment situation you should consult the appropriate professionals.
Certified Financial Planner Board of Standards, Inc. (CFP Board) owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, and CFP® (with plaque design) in the United States, which it authorizes use of by individuals who successfully complete CFP Board’s initial and ongoing certification requirements.