It’s not unusual for the stock market to be a topic of conversation at social gatherings—especially during summer – especially when there are really big up and down days like we had this week.

A neighbor might ask which investments are ‘working’ for you at the moment. A relative may talk about the impending recession that’s drawing near. 

The lure of getting in at the right time or avoiding the next downturn may tempt even disciplined, long-term investors. 

Be careful. Successful market timing isn’t as straightforward as it sounds. 

Outguessing The Market Is Difficult

Attempting to buy individual stocks or make tactical asset allocation changes at exactly the “right” time presents investors with substantial challenges. Markets are fiercely competitive and adept at processing information. 

During 2018, a daily average of $462.8 billion in equity trading took place around the world.[1] The combined effect of all this buying and selling is that available information (from economic data to investor preferences) is quickly incorporated into market prices.

Do you think you can make a decision based on an article from this morning’s financial section? Or a story on Seeking Alpha? Or is it possible that information is already reflected in market prices?  

Over the last 20 years, 77% of equity funds and 92% of fixed income funds failed to survive and outperform their benchmarks after costs, according to a recent study by Dimensional.[2] This data shows that even professional investors have difficulty beating their market benchmarks.

Further complicating matters, investors must make the call to buy or sell stocks correctly not just once, but twice, in order to have a shot at successfully timing the market. 

“Timing markets is the dream of everybody. Suppose I could verify that I’m a .700 hitter in calling market turns. That’s pretty good; you’d hire me right away. But to be a good market timer, you’ve got to do it twice. What if the chances of me getting it right were independent each time? They’re not. But if they were, that’s 0.7 times 0.7. That’s less than 50-50. So, market timing is horribly difficult to do”

–Professor Robert Merton, a Nobel laureate, in an interview with Dimensional.

Too High For Too Long

Yes, the S&P 500 Index has logged an incredible decade. Should this result impact investors’ allocations to equities? Exhibit 1 suggests that new market highs have not been a sign of negative returns to come. The S&P 500 went on to provide positive average annualized returns over one, three, and five years following new market highs. 


Exhibit 1.       Average Annualized Returns After New Market Highs

S&P 500, January 1926–December 2018

In US dollars. Past performance is no guarantee of future results. New market highs are defined as months ending with the market above all previous levels for the sample period. Annualized compound returns are computed for the relevant time periods subsequent to new market highs and averaged across all new market high observations. There were 1,115 observation months in the sample. January 1990–present: S&P 500 Total Returns Index. S&P data © 2019 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. January 1926–December 1989; S&P 500 Total Return Index, Stocks, Bonds, Bills and Inflation Yearbook™, Ibbotson Associates, Chicago. For illustrative purposes only. Index is not available for direct investment; therefore, its performance does not reflect the expenses associated with the management of an actual portfolio. There is always a risk that an investor may lose money.


You Still Have To Save “Enough”

Even if you could outguess the market (which I don’t believe you can do), you would still have to have enough money working in the market for the market to work for you. 

And here’s the most important point… 

The amount you save (day in and day out, week in and week out, month in and month out, year in and year out) is the dominant variable that determines your financial success. “Savings” is the iron wire upon which your financial future hangs. 

Even if you could predict the immediate direction of markets, you can’t know how much average annual return you can plausibly expect over the next 20-30 (plus) years. You still have to save in order to fill the gap between what you have and what you might need.

This is why every excellent portfolio should begin with a comprehensive financial plan. 

Even if you choose to manage investments yourself, you should start by understanding what you value and prioritize the most. Then, you can create a written document that expresses the trade-offs you’ll enthusiastically embrace to ensure these priorities are met. Understanding your own path to a meaningful life and planning your trade-offs are the starting points for both personal financial success and a happier life.

The Bottom Line

Outguessing the market is more difficult than most investors think. While favorable timing is theoretically possible, there isn’t much evidence that it can be done reliably, even by professional investors. 

Thankfully, investors don’t need to time markets to have a positive investment experience. Over time, capital markets have rewarded investors who have taken a long-term perspective and remained disciplined in the face of short-term noise. 

By focusing on the things you can control (like having an appropriate asset allocation, diversification, and managing expenses, turnover, and taxes) you better position yourself to make the most of what the capital markets have to offer.

Want to read more articles about the stock market? Check out: 


[1]. In US dollars. Source: Bloomberg LP. Includes primary and secondary exchange trading volume globally for equities. ETFs and funds are excluded. Daily averages were computed by calculating the trading volume of each stock daily (the closing price multiplied by shares traded that day). This trading volume is summed and divided by 252 trading days.

[2]. Mutual Fund Landscape 2019