The phrase “I think the market is going to” is the most expensive phrase in personal finance. Not because it’s always wrong — sometimes it’s right — but because being right occasionally costs about the same as being wrong consistently. The math of market timing is one of those quietly cruel facts of investing: the asymmetry is against you.
Consider what’s actually required to make a successful timing decision. You have to be right about the direction. You have to be right about the magnitude. You have to be right about the duration. And then — the part most people skip — you have to be right about when to go back in. Four correct guesses, in a row, on something that has resisted prediction for a hundred years.
You don’t get hurt by missing the worst days. You get hurt by missing the best ones.
The historical evidence is unkind to timers. Most of the long-term return of the market comes from a small number of days, and those days cluster around the worst days. The best and worst trading sessions of any decade are often the same week. The investor who steps out to avoid the bad days almost always misses the good ones, because their distribution is the same distribution.
This is not a moral lesson about discipline. It’s an arithmetic one. The cost of missing the top ten days of a decade is roughly half the total return of that decade. The cost of missing the top thirty is most of it. There is no way to systematically catch the good days while ducking the bad ones, because they don’t come labeled.
What this means in practice
For a retired or nearly-retired investor, the temptation is sharpest. The portfolio is the largest it’s ever been; the consequences feel personal; the news is loud. The reflex is to “do something.” Almost always, the something that’s right to do is something you already decided to do — in a calmer year, on a different page of the plan.
So I tell clients: the plan is for the loud years. The work we do now is so that when the news is awful, your rule is already written. Two years of essential spending in something steady. A long-term portfolio that you don’t have to touch. A schedule for rebalancing that has nothing to do with how you feel.
When you have a rule, you don’t have to guess. The cost of guessing is what the rule is buying you out of.
— Bruce