Market Timing Is Overrated: Here's Why

Buy low and sell high. Investors are certainly familiar with this popular adage regarding the stock market. It seems so simple. And of course, who doesn’t want to be able to successfully jump in and out of stocks?

But this implies, at a high level, that you can properly time the market. While alluring, this is an extremely overrated activity. Here’s why.

Image source: Getty Images.

More trades lead to poor performance

Some research suggests too much trading activity actually hurts returns. Investors, often overconfident in their ability to time the market, typically buy and sell at the wrong times.

Consequently, this leads to poor portfolio performance. That’s because the market frequently registers its biggest gains on the days immediately following its worst declines. It’s impossible to consistently avoid the worst days and capture the best ones.

Between the start of 2005 and the end of 2024, the S&P 500 (^GSPC +0.20%) generated an annualized total return of 10.4%, according to JPMorgan Chase’s Asset Management division. The firm’s research reveals that if you missed the 10 best days during this time, your annualized total return would fall substantially to 6.1%.

It’s difficult to not want to constantly make moves to adjust your portfolio. There’s an abundance of information available, driven by the internet that facilitates the creation and distribution of nonstop commentary. This means there’s a lot of noise out there. It’s hard to ignore this. And it’s even more of a challenge to figure out the information that actually matters.

Additionally, zero-fee brokerages are common these days. This wasn’t the case even 10 years ago. But thanks to the early popularity of Robinhood Markets, the rest of the industry followed suit. Greater portfolio activity can also be incentivized by having no obvious cost to trade.

Time in the market is what matters most

Charlie Munger, who passed away in 2023, was Waren Buffett’s right-hand man for decades at Berkshire Hathaway. He once said, “The big money is not in the buying or selling, but in the waiting.” Investors should take this to heart.

The stock market is a wonderful wealth-building tool. However, investors should get out of their own ways. The absolute best thing to do is put money to work early and often, preferably in a low-cost S&P 500 exchange-traded fund, and be patient. This allows compounding to work its magic, which can lead to fantastic results over the long term.

At the end of the day, volatility can’t be avoided. And no amount of effort, like trading extensively or spending extra time researching and crunching numbers, can change this reality. Understand that being able to handle the ups and downs is a requirement for success.

The smartest and most disciplined investors know this. And that’s why they stay away from timing the market as if their financial lives depend on it.