The Costs of Market Timing | AWM Insights #116

Can you trade on the market inefficiencies and come out ahead after costs and taxes?

 

The evidence is clear and it isn’t good news for the market timers. These market timers are investors and advisors that promise to get out at the top and then get back in at the bottom. It sounds great in theory, but because the public markets are so efficient, the evidence is clear that it isn’t possible over the long run. Many investors have poor investment experiences because they try to accomplish the impossible rather than focusing on the things that they can control.

 

Jumping in and out of the market is a fool’s game and that shouldn’t be thought of as a negative at all. It’s an opportunity to reframe and focus on what you can control when it comes to investing. This includes tax efficiency and minimizing costs, but also goes deeper into diversification and properly protecting your financial house from uncertainty. 

 

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EPISODE HIGHLIGHTS:

(0:28) Athletes at the highest level know they are playing the game at a different level than the amateurs. This is the same in the investing world. (1:10) Not trying to outguess or time the market. Don’t outsmart yourself here.(1:29) Eugene Fama. famous for the efficient market hypothesis. famously quipped “I’d compare stock pickers to astrologers but I don’t want to bad mouth the astrologers.” (2:15) The outright number of competitors playing the “investing game” are intelligent and skilled adversaries with everyone on a level playing field of information.     (3:21) Markets are not perfectly efficient, but it is the best model to explain what is happening that has been created so far. (3:30) Can you actually trade or invest on market anomalies and come out ahead? The answer in the data is no. Not when you factor in the costs and taxes.(4:30) A great question commonly asked is “where is the market going?” No one has a crystal ball to answer this question and if somehow they could accurately predict the market, they would be making money off of it and not divulging their secret power. (5:00) Going to the evidence proves over and over again that it is a fool’s game.(5:42) The cost of missing one week in the market at the wrong time can cost you as much as 15%. (6:48) If you jumped out of the market during the global credit crisis, which many did amidst the uncertainty, missing just 6 months was a massive cost in lost wealth.(7:31) The positive of all this is the fact that market returns are actually very good. Getting those expected returns and focusing on improving them with tax efficiency and reductions in the costs that erode returns is a good use effort.   (8:04) Missing out on the factors that improve performance combined with the power of compounding can factor into leaving massive amounts of your wealth on the table.   (8:34) Market timing can be extrapolated out to emerging markets or real estate. Are you costing yourself by not being in certain markets? (9:03) If you got a 20% return, is that good? Well, what did the market do? You may have cost yourself money because another market did even better than that.        (9:30) When market timing, you have to be right when you get out and then also when you get back in. You can play this same game across all markets.  (10:25) You have to be right at the outset, then you have to guess how long it will last. Then you have to be right when getting back in and to what market. If you get any of these decisions wrong you have created a massive cost to yourself.(12:30) You still want to participate and buy good companies. Right-sizing the investment is the key to avoiding when to get in and when to get out. (13:40) In March of 2020, few people predicted the market would recover so quickly with tech outperforming. Then the dynamic changed in late 2021 with tech crashing and underperforming.   (14:50) If you missed the 3 months of the COVID crash by pulling out all your money before the decline. You actually would have missed out on 30% of gains by being right about a global pandemic. (15:22) It sounds good to avoid the losses and get out and then get back in but playing this game will cost you money in the long run. (15:30) If you want a better investment experience turn your focus to what you can control. Don’t try to outguess the market and don’t chase performance. A data-driven investing experience lets markets work for you and grow your wealth. Don’t get in the way or let your broker get in the way. The capital markets have done this for over a hundred years.