“Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves” — Peter Lynch, who churned out stellar returns as the manager of Fidelity’s Magellan Fund.
“We continue to make more money when snoring than when active” — Warren Buffett, chairman and CEO of Berkshire Hathaway
Etc., etc., etc.
Yes, from investing legends to mom-and-pop financial planners, retail investors are constantly bombarded with “buy and hold!” For many, however, the temptation to roll the dice is still there, and this chart from Michael Batnick’s Irrelevant Investor blog probably isn’t helping to fight that urge:
This “surprising” illustration shows that cash has outperformed stocks 36% of the time over rolling 5-year periods (after inflation). Batnick’s takeaway: “So maybe you should time the market, just make sure you’re right.”
Therein lies the rub, of course.
While there’s a whole universe of examples of why market timing is dangerous, Batnick cherry-picked an especially telling one from 2013. As you can see from the chart, stocks were approaching record highs and valuations were peaking.
The previous two times those lofty levels were reached, the stock market proceeded to crash more than 50%. Seems like a reasonable time to sell, right?
Well, in the five years since that moment, the S&P 500
has only soared some 90%. Stocks, Batnick points out, would need to drop 42% just to get back to where they were when the decision was made to get out in 2013.
“Waiting for a better pitch is always tempting, but timing the market is notoriously difficult, even for the shrewdest investors,” he wrote. “If you have multiple decades ahead of you, there will be plenty of inflection points. Are you going to nail every one of them?”