How Trying to Time the Stock Market Destroys Your Wealth

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If you invest in stocks, you probably dream of correctly timing the market. Who wouldn’t want to know exactly when to buy shares just before they soar or to sell them just before they plunge?

But study after study shows that timing the market successfully over the long haul is nearly impossible. Even worse, trying to guess the direction of the stock market can be downright disastrous to your efforts to build wealth.

A new study from J.P. Morgan Asset Management illustrates the danger of a failed market-timing strategy.

The analysis looked at a 20-year period — Jan. 1, 2002, through Dec. 31, 2021 — and determined how much a $10,000 investment in the S&P 500 stock market index would have grown based on whether an investor remained fully invested throughout those years or tried to sell out during low periods.

As it turned out, guessing wrong and pulling out of the market could result in missing some of the best days for gains. And missing even a handful of those days can have an incredibly negative impact on a portfolio.

Here are some scenarios that reveal how much your personal wealth might grow — or shrink — based on trying to time the market.

Staying fully invested for all 20 years

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Result: Your $10,000 investment grew to $61,685, an annual return of 9.52%.

Legendary investor Warren Buffett once famously quipped, “Our favorite holding period is forever.”

The Oracle of Omaha believes that when you buy the stock of a quality company, you should hold on to it unless you have a compelling reason to sell. That is the essence of buying stocks for the long haul.

Those who followed the Buffett philosophy saw splendid returns in the 20-year study period, with their wealth growing more than sixfold.

Missing the 10 best days

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Result: Your $10,000 investment grew to $28,260, an annual return of 5.33%.

Twenty years is a long time to go without making a mistake. Let’s say you largely bought into the Buffett “buy-and-hold” ethos but still let your guard slip just often enough to cave in to your fears and sell so that you missed the 10 best days during those two decades.

There are more than 5,000 trading days in a 20-year period. If you had the bad luck to exit the market for the best 10 days during that time frame, your gains would have dropped from $61,685 (had you stayed fully invested) to $28,260.

In other words, an itchy trading finger reduced your gain by more than half.

Missing the 30 best days

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Result: Your $10,000 investment grew to $10,904, an annual return of 0.43%.

Somewhere, someone is reading this story and thinking:

“Yeah, yeah, Buffett is a legend. But he’s a codger! Buy-and-hold? That’s yesterday’s news. Times have changed. Rapidly trading in and out of crypto and meme stocks is where it’s at! Do your research, and you’ll get rich!”

There have always been folks who think they can outsmart the market, and there always will be. They are some of the same investors who swore by the “Nifty Fifty” stocks five decades ago or chased tech stocks in the 1990s.

Both strategies seemed shrewd at the time, until they blew up. Maybe you’ll beat the odds and guess right when timing the market. More likely, you’ll end up getting pummeled when hubris causes you to miss the best days in the market.

For example, had you missed the 30 best days in the 20-year study period, your $10,000 would have grown by a pitiful $904 over that two-decade time frame.

Missing the 60 best days

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Result: Your $10,000 investment shrank to $3,698, an annual return of -4.85%.

Imagine the pain of realizing that exiting the market for just 30 days over a 20-year period left you with a $904 gain while your buy-and-hold neighbor earned $51,685 over the same period.

However, it could have been worse. Much worse.

Had you traded even more often and missed the 60 best days during that time, your $10,000 would have shrunk to a paltry $3,698.

The lesson

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Timing the market is extremely difficult. As J.P. Morgan Asset Management points out, during the 20-year period from Jan. 1, 2002, through Dec. 31, 2021, seven of the best 10 days in the stock market occurred within two weeks of the 10 worst days.

In other words, things change fast. Guessing when to get in, predicting when to get out and acting on those hunches is all a tall order. You are much better off crafting a winning long-term strategy and sticking with it year after year.

Turning to Buffett again, he once said this about buying the S&P 500 index: “Keep buying it through thick and thin, and especially through thin.” He added:

“The temptation when you see bad headlines in newspapers is to say, well, maybe I should skip a year or something. Just keep buying. American business is going to do fine over time, so you know the investment universe is going to do very well.”

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