Investing / Wealth Management

Buy and Hold Investing vs Market Timing

Published by Bob Gustafson

Buy and Hold Investing vs Market Timing

One of the most common questions that I get has to do with market timing. People seem to think that financial advisors have some investment ouija board that will let us know exactly when you should get in and get out to maximize your return. Unfortunately, if you think timing the market is a sound investment strategy, you need to think again.

Why you should never try and time the market

There is a mountain of data that exists showing that it is highly improbable for anyone or anything to consistently outperform a buy and hold investment strategy using any type of market timing strategy.

The data overwhelmingly supports a buy and hold investment strategy over market timing. So why do so many individual and professional investors still believe they can time the market successfully over long periods?  Absent insider information or market manipulation, I’m convinced that it is simply human nature.

Emotions vs Logic

As human beings we have many fears, not the least of which is the fear of not being in control of the world around us. We do everything that we possibly can to control and dominate our environment. This holds true about how we view the future as well.

Throughout history, humans have tried to invent many ways to see into the future because if we could do so successfully, we ultimately can dominate and control it. We want to believe so badly that we can control the future, that we will come up with every mind trick there is to help support this view.

As it relates to the investment world, the greatest of all mind tricks is thinking that you can successfully time the market over long periods of time. The problem with this belief is that our human emotions and fears affect the decisions you make.

It isn’t easy being human and it isn’t easy to admit to oneself, that no matter how prestigious the college you went to was, or how high your IQ is, or that you have direct lineage to King David, you cannot control or see the future any better than anyone else. I honestly believe that if God came to the planet tomorrow and presented to the investment community that market timing doesn’t work, folks still wouldn’t believe it.

Why Buy and Hold Investing Wins

Buy and hold investment strategy is a more disciplined approach to investing that delivers higher market returns. It is called buy and hold because the strategy is to buy stocks with the intention of holding them for the long term regardless of the fluctuations in the market. This doesn’t mean that you buy and ignore your investments. You should, along with your financial advisor, review and monitor your portfolio regularly.

But it is impossible to predict with certainty when to enter and exit the market. To get the timing right, you must predict the perfect time to exit the market and then predict the perfect time to get back in before it rises. Most who try to time the market usually wait too long to get back in and buy back into the market equal to or higher than when they got out. This is precisely why market timing produces the lower returns.

Listen to our two part discussion on buy and hold investing vs market timing from the Financial Spotlight radio show »

If you want to have a gambling account that you play around with and try to time the market in hopes of getting lucky, that’s OK (I have one). But investing serious money trying to time the market is never a good idea because losing money shouldn’t be viewed as a form of entertainment.