Trying to Time the Market? Consider the Importance of Staying Invested

Even long-term investors can sometimes use timing strategies to go in and out of the market, but spending long-term time in the market could beat timing the market. Timing the market
5 min read
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Key Takeaways

  • Trying to time the market can be risky because you could miss a big rally
  • Research shows missing the best 10 trading days of the last 15 years would have severely hurt returns
  • Understanding your goals and sticking to them, rather than jumping in and out, is an approach to consider

If you’re a long-term investor, you’ve probably heard the best way to weather a market storm is to keep your head down and wait it out. Trying to time the market can put you at risk of buying or selling at the wrong juncture and missing a rally.

“Market timing may be a risky proposition,” said Viraj Desai, senior manager of portfolio construction at TD Ameritrade Investment Management, LLC. 

For example, look at 2020. Think of the fear that gripped the market in March of that year as the COVID-19 pandemic caused shutdowns worldwide, leading U.S. stocks to the quickest bear market plunge (down 20% from the recent high) in history. It took just about a month to go from all-time highs in the S&P 500 Index (SPX) in February 2020 to three-year lows by late March 2020.

Almost as fast as it started, the bear market ended. It was over in a month, and the SPX rose more than 75% between March 2020 and March 2021.

Staying invested isn’t just something that worked for investors during the pandemic. Research found that missing just a handful of the market’s best days could have caused you to lose out on the majority of potential gains over a recent 15-year period.

For instance, if someone had invested $10,000 in the SPX at the end of 2005 and simply ridden out all the bull and bear markets since then (even the historic drops of 2008 and 2020), they would have finished 2020 with more than $41,000 thanks to an annualized return of 9.88%, according to research by Putnam Investments.

On the other hand, if they’d tried to time the market by moving in and out of stocks and managed to miss the best 10 days of that stretch, they’d have ended up with less than $19,000 on an annualized total return of 4.3%. If they’d somehow managed to miss the 30 best days between December 31, 2005, and December 31, 2020, they would’ve lost more than $2,000 out of their original $10,000 due to annualized negative returns. That’s just 30 days out of thousands spread over 15 years. These numbers certainly help explain why stock market timing can be risky.

Remember: Only one person can sell at the exact high or buy at the exact low. Even the best Wall Street traders can’t do that consistently.

That doesn’t necessarily mean you’re stuck in place as Wall Street gyrates, however. But it helps to have a plan and stick to it.

Establish Your Investment Rules

You can buy or sell when times get turbulent, but many investors who do choose to get in and out of the market prefer to establish solid rules about entry and exit times before jumping in (or out). Making rules for yourself can potentially help investors avoid holding onto losing positions for too long or buying a given stock at lofty levels it might not be able to hold.

“It starts with having a plan before you place the trade,” said JJ Kinahan, chief market strategist at TD Ameritrade. “This applies not only to price, but to time frame. Being true to your time frame can help a lot.”

Here are some rules investors (and traders) should keep in mind when they trade in volatile times (or pretty much any time):

  • Know your time frame. This means when you buy a stock, you know how long you intend to hold it. “Are you playing this because the stock got whacked and you think the stock will have a bounce for a quick profit over a few days or a week?” Kinahan asked. “Or are you willing to hold the stock for years?” The decision, he said, could depend on the stock. For instance, consider a major company whose shares have been beaten up over the last year. If a stock is going through hard times, are you going to promise yourself that you’ll hold it long enough for the company to potentially regain its footing?
  • Know your “get out the door” price. Sometimes investors double down when a trade goes against them. They tell themselves they’ll hold it just a little longer, hoping to see a recovery, but all the while losing more money. Before buying a stock, especially in volatile times, many traders will have a bottom price level they’re not willing to see the stock fall below—and then keep their plan to sell at that level. If you can’t stick to your guns, Kinahan said, “It’s like someone being on a diet and saying they’ll lose 10 pounds even as they eat a peanut butter cup.”
  • Know your size. Before buying, get a sense of how many shares you’ll feel comfortable holding. Remember that you can ease your way into a position rather than buying all at once, although this could admittedly increase your trading costs. Kinahan pointed out that if you want to own 400 shares of a stock, one approach is to start by purchasing 200 shares at a given price level and then perhaps add 200 more shares later, maybe even at a lower price if you still believe in the stock. 
  • Know when to seek guidance. Rather than trying to identify the right time to invest or divest, you could work with a team of professionals who would build and manage your portfolio for you. “If you’re planning to go it alone, then establishing some hard-and-fast rules for yourself is a must,” Desai explained. “However, working with a professional can give you access to a team of professionals to make investing decisions on your behalf.”

Calling in the Professionals

Working with a professional to develop a plan that identifies and helps you pursue your goals is a key first step in the investing process for many, especially investors who don’t want to be as hands-on or worry so much about portfolio management.

Staying the Course to Help Pursue Objectives

For long-term investors, stock market timing strategies may not be relevant, even when things get volatile like they did during the pandemic. The recent choppiness may have you nervous, but perhaps that old idea of keeping your head down and not watching every headline or stock tick makes sense at this point, especially if you don’t need your money for a long time.

“A common long-term investor attitude may be to look at pullbacks or corrections as potential opportunities, especially if you have a long-term time horizon, by staying the course and being disciplined,” noted Robert Siuty, senior financial consultant at TD Ameritrade. “Making systematic, periodic additions to your diversified portfolio over time and taking advantage of things like dollar-cost averaging is a common approach helping with building wealth in the long run.” 

Desai added: “No investor has a crystal ball that will tell them the exact right time to buy or sell. Planning for your goals, staying invested, and evaluating professional portfolio management will give you some basic ideas to consider for your financial future.”


Key Takeaways

  • Trying to time the market can be risky because you could miss a big rally
  • Research shows missing the best 10 trading days of the last 15 years would have severely hurt returns
  • Understanding your goals and sticking to them, rather than jumping in and out, is an approach to consider
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