Trying to Time the Market

The average investor underperforms the market they are invested in by 2–3% per year due to buying high and selling low. Market timing is the mechanism. The best market timers think they are right maybe 40% of the time—no better than random.

Key takeaways

• Staying out of the market in cash while waiting for a crash costs more than the crash itself in most scenarios
• From 2008–2020, the 10 best days in the market added up to 50% of all gains; missing them reduced returns by half
• A person who sold everything in September 2008 thinking "the crash is coming" would have been right, but missed the 65% recovery and did not get back in
• The phrase "I'll get back in when..." is almost always wrong, because it requires both exiting at the right time and re-entering at the right time
• Dollar-cost averaging (investing fixed amounts regularly) sidesteps timing entirely and forces you to buy more when prices are low

The mathematics of missing the best days

The S&P 500 from January 2009 to December 2019 returned roughly 400% cumulatively, or about 17% per year. Let's examine what happens if an investor misses the 10 best days:

• If you were fully invested: $10,000 becomes $50,000
• If you missed the 10 best days (which you cannot predict in advance): $10,000 becomes $33,000
• Difference: $17,000, or 34% of the gains

Or from January 2010 to December 2024: the S&P 500 returned roughly 500% cumulatively. If you missed the 50 best days out of 3,650 trading days:

• Fully invested: $10,000 becomes $60,000
• Missed 50 best days: $10,000 becomes $22,000
• Difference: $38,000

The issue is that the best days cluster after the worst days. A 30% crash often recovers 5% the next week. If you sold before the crash, you missed the crash but you also missed the recovery. And you are sitting in cash at 4% yield, watching the market climb.

Here is the trap: in September 2008, many investors thought "The crash is coming" and moved to cash. They were right. The market fell 50% by March 2009. They felt smart. But then it rose 65% from March 2009 to mid-2010. They did not re-enter because they were waiting for "confirmation" that the recovery was real. By 2012, they had missed most of the recovery and finally bought back in. Over the full cycle (2008–2012), they had underperformed because they were out of the market during the recovery.

The "I'll get back in when..." problem

This is the fundamental issue with market timing. A person says:

• "I'll get back in when the market drops 20%" (missing the 5% recovery from the bottom)
• "I'll get back in when it's below the 200-day moving average" (technical analysis that does not work)
• "I'll get back in when I see confirmation" (waiting so long that you miss the bulk of the recovery)
• "I'll get back in after the election / next quarter / earnings season" (by then the market has already moved)

Every delay compounds. If you sell in September 2008 (right call, wrong outcome because you do not re-enter), the cost is not just the 50% loss you avoided. It is the 50% loss plus the time cost of re-entering late.

The empirical record

Vanguard analyzed investor returns versus fund returns over 20+ years. The gap is called "behavior gap" or "investor gap." For equity mutual funds, the gap is 1–3% per year, with retail investors underperforming due to buying high (after good performance) and selling low (during downturns).

A study by Morningstar found that from 2004–2019, a typical mutual fund returned 8.3% per year, but the average investor in that fund returned 5.8% per year—a 2.5% per year gap, almost entirely due to timing.

Another study: from 2000–2020, the S&P 500 returned 9.7% annualized, but the average investor returned 5.6% per year. The 4.1% gap was almost entirely due to:

1. Being out of the market during rallies (selling after losses, staying out too long)
2. Paying high fees (reducing returns directly)
3. Over-trading (transaction costs and taxes)

Why market timing fails even for professionals

Warren Buffett has noted that even professional investors rarely succeed at market timing. The reason is simple: you need to be right twice—right on when to get out, and right on when to get back in. Get either one wrong and you lose.

A person who shorted the market in 2016 (predicting a crash) was early and probably gave up before the actual 2020 crash happened. The cost of being early is often worse than the cost of being wrong.

The legendary investor John Maynard Keynes said: "The market can remain irrational longer than you can remain solvent." This means even if you are right about the eventual direction, you might run out of cash or lose your nerve before you are proven right.

Dollar-cost averaging: the anti-timing approach

The simplest way to avoid timing is dollar-cost averaging (DCA): invest a fixed amount regularly (every month, every quarter, every year) regardless of market conditions.

A person who invested $5,000 per month starting January 2008:

• January–August 2008: invested $40,000 while prices were falling (average price: higher than the crash bottom)
• September 2008–March 2009: invested $35,000 while prices were at the worst (average price: near the crash bottom)
• April 2009 onward: prices recovering (but you are still buying, so average price is still good)
• By 2012: you have invested $240,000 at an average price that is lower than where the market closed in 2012

Compare this to a person who tried to time it:

• January 2008: invested $60,000 (thinking it was cheap)
• Market crashed 50%
• March 2009: $60,000 is now $30,000; you have no more cash to buy the dip
• You wait for "confirmation" of the recovery
• By 2012: you are back in but the average price you bought at is higher than the DCA investor

The DCA investor bought more shares when prices were lowest (involuntarily, because they were saving monthly), so their average cost was lower and their total return is higher.

This is why automatic contributions to a 401(k) or Roth IRA work so well. You are forced to dollar-cost average, which removes the temptation to time the market.

When to adjust allocation (not timing, but rebalancing)

There is a difference between market timing (sell everything, move to cash, wait for the crash) and rebalancing (sell some bonds to buy stocks, or sell some stocks to buy bonds, to maintain your target allocation).

Rebalancing is not timing. It is a mechanical process:

• You have a 60/40 (stocks/bonds) target
• Market rally pushes it to 70/30
• You rebalance by selling 10% of stocks and buying bonds
• This forces you to sell high (stocks at peak) and buy low (bonds at lower valuations)

Rebalancing is anti-timing: you are contrarian automatically. You do it regardless of predictions about future market direction.

Process

Next

Trying to time the market leads to being out during the best days. But many investors make an even more extreme mistake: they do not just sell at bad times, they panic-sell during major drawdowns, locking in losses that would have recovered if they had just held on.

Related concepts

• Panic Selling During Drawdowns
• Checking the Portfolio Too Often
• Why We Rebalance