You have heard it’s useless to try to “time the market” in the short term — that is, to try to get out of the market before a sudden drop or get back in when things are low. Well, believe it! The markets just aren’t very predictable over short periods of time. Below is a two-week period that illustrates, using a chart from the excellent MSN money:
The chart above reflects what happened right after the big U.S. debt downgrade. That downgrade had been rumored for weeks and months — so when it hit on August 5, the smart money was not surprised, even a little. What if you sold your stocks after that first panicked day of selling? You would have lost a bunch of money for no good reason.
Despite all that volatility, after two weeks the market was about where it had started out. With perfect foresight, of course, you could have sold out at the tops and bought in again at the bottom. But no one has perfect foresight. That’s why “buy and hold” is the way to go with your serious money. Forget about trying to make money (or even preserve your money) by buying and selling on peaks such as those in the chart. Several important points:
- There is no guarantee that the market will always recover. If there were such a guarantee, stocks would be safe and the return would be lower as a result.
- Most big events are already embodied in stock prices before you can act. That was true for the downgrade. By the time it happened, it wasn’t new news to any of the smart money.
- If your financial adviser promises to “time the market” for you, run to the door and get your money out. Don’t walk.