These days, some people may have a 'sure-fire' way to time the stock market. Just check out the
Internet. You can find screens advertising market timing services. A trip to your local library will
yield an equal abundance of market timing theories in books, magazines, and other periodicals.
And some of these theories may or may not work.
The idea behind market timing is to buy stock when prices are low, hold onto your investment
until the market peaks, and subsequently move your stock investments into cash until the market
hits bottom. Then, the process begins all over again. It sounds simple enough. The problem,
though, is that all timing theories are based, at least in part, on second guessing the stock market.
Different timing theories consider various 'indicators' that may signal that the market is about to
head up or down: margin debt, interest rates, employment data, manufacturing levels, number of
advancing stocks versus number of declining stocks, and so on. However, even with the most
sophisticated methods, hitting the exact highs and lows of the market is next to impossible.
What happens if your timing is off and you don't reinvest in the market at the right time? The
consequences of not being fully invested when a major market upturn occurs can be disastrous to
your long-term investment plans. Studies of stock market history have shown that not being
invested at the 'right' times can be costly to an investor. Consider the following hypothetical
example based on the return of the S&P 500.
On June 30, 1994, Susan invested $10,000 in a stock index fund based on the S&P 500 Stock
Index. As noted in the chart below, by June 30, 2004, the $10,000 would have grown to $31,260,
an average annual total return of 12.07%.
However, suppose Susan decided to get out of the market periodically during that five-year
period, and as a result she missed the market's ten best single-day performances. If that were the
case, her 10.04% return would have fallen to 4.95%. As well, if Susan missed the market's best
20 days, that 10.04% return would have dropped to 1.11%. Of course, the performance of an
unmanaged index is not indicative of the performance of any particular investment. The
performance of an index assumes no transaction costs, taxes, management fees or other expenses.
It is not possible to invest directly in any index. Past performance cannot guarantee comparable
The Penalty for Missing the Market
Trying to time the market can be an inexact - and costly - exercise. This chart illustrates a $10,000 investment in
the S&P 500 Index from Dec. 31, 1994 - Dec 31, 2004.
Source: Factset Research Systems as provided by AIM Distributors, Inc.
The Best Defense
|Period of investment
||Average annual total return
||Growth of $10,000
|Miss the Best 10 Days
|Miss the Best 20 Days
|Miss the Best 30 Days
|Miss the Best 40 Days
|Miss the Best 60 Days
Market fluctuations can make almost any investor nervous. But getting out of stocks when the
market takes a downturn isn't the answer. Don't let short-term volatility drive your long-term
investment planning. Your best defense against a fluctuating market is a well-diversified
portfolio and a disciplined program of periodic investments.
Spreading your investments among stocks, bonds, and cash in a strategic asset allocation that
takes into account your time horizon, risk tolerance, need for investment income, and long-term
goals can help your portfolio produce more consistent returns, regardless of whether the stock
market is up or down. When the stock market is not performing well, your returns from bond and
cash investments can help supplement your stock returns.
Making regular investments in a stock or stock mutual fund when the market is down as well as
when it is on the rise is a strategy known as dollar cost averaging. With dollar cost averaging,
you invest a fixed amount monthly or quarterly. When the market is down, your money buys
more shares. Over the long-term, the average price you pay per share generally may be lower
than the average price of the stock investment during the same period. Investing regular amounts
steadily over time may lower your average cost but cannot guarantee a profit or protect you from
a loss in a declining market. Effectiveness requires continuous investing regardless of fluctuating
prices. You should consider your ability to continue buying through periods of low prices.
Wise investors don't try to second-guess the financial markets. They take a structured,
disciplined approach to investing that recognizes that market declines inevitably will occur.
Eric C. Weiss is a registered representative of Lincoln Financial Advisors, a
broker/dealer, and offers investment advisory service through Sagemark Consulting, a division of
Lincoln Financial Advisors Corp., a registered investment advisor.
This information should not be construed as legal or tax advice. You may want to consult a
tax advisor regarding this information as it relates to your personal circumstances.