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Don't waste your hard-earned cash trying to time the market

by , 28 July 2015

In spite of being almost impossible to do successfully, there are investors who try to time their entry and exit from the stock market.

By trying to time the market, you'll no doubt be wrong the vast majority of the time.

Here's why you should avoid market timing and what you should do instead…

Why market timing doesn’t pay off

There are some investors who’re determined to time the market.

For example, they believe the stock market won’t fall any more so they put all their cash back into stocks. Or they think the stock market won’t rise higher so they sell out of all their positions.

But the majority of these market timers get it wrong.

William Sharpe, who won a Nobel Prize for his work, looked into market timing in a study he did in 1975. He found that a market timer would need to be right an astonishing 74% of the time to outperform a simple index fund.

In 1992, SEI Corporation updated the work Sharpe did. This time they did it over a much longer period of time, from 1901 to 1992. Their research showed that a market timer needed to be right 91% of the time to outperform a simple index fund.

Trying to time the market is almost impossible and it’s something you need to avoid. Your stock market returns will pay the price, Keith Fitz-Gerald in Total Wealth explains.

Aim for the average market return

Market researchers DALBAR showed that the average investor who tried to time the market achieved a modest annual return of 2.53% for the 20 years from 1993 to 2013. Over the same period, the markets generated an average annual return of 9.02%.

In many instances, investors overestimate their ability at predicting where the market is going. This leads them to make unfounded, spur of the moment decisions with their investments.

A better bet is to use a solid long-term investment strategy, building up your holdings over time. If you don’t have faith in your stock picking ability, invest in an index tracker instead.

So there you have it. Why you shouldn’t waste your hard-earned cash trying to time the market.

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Don't waste your hard-earned cash trying to time the market
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