We’re being awfully hard on the average investor but make no mistake, we’re the first ones to admit we can’t predict what the market is going to do either. If ever there was a year to show investors that market timing is truly a fool’s errand, it was 2016. Look what happened:
- Economic slowdown in China
- Oil fell below $30/barrel
- Britain voted to exit the European Union
- Donald Trump was elected
If the average investor had a crystal ball and predicted all of the above, they most likely would have pulled their money and gone to cash waiting for sunnier days. And that would have meant they were on the sidelines for some of the best days of the year. In fact, a significant portion of investment performance came in the last seven weeks of the year despite predictions that a Trump victory would send markets into a prolonged tailspin.
As much as investors like to think they can predict what the market is going to do in the future, there’s a lot of research to show that isn’t reality. “Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.” – Peter Lynch
Emotions of fear and greed will dictate when investors buy and sell as often (or more often) as any algorithm or strategy. Regardless, both can result in investors being out of the market when considerable gains occur. As shown above, missing out on even a handful of “best weeks” can have lifelong consequences for you and your investments. We know we can’t accurately predict the best time to buy or sell or what the market is going to do in any given week. We’d suggest investors don’t try to do it either.
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