Are You Trying to Time This Market?

By Andrew Massaro, CFP®, CFS
Senior Financial Planner

Are you a long-term investor? Many people think of themselves as such. After all, they say, they have been investing for a long time, and their goals are ten or more years away.

Yet, most people – maybe you, too – may not be long-term investors at all. You see, a true long-term investor is not merely a person who has been investing for many years, or who plans to invest for many years. A true long-term investor is one who owns the same investments for many years.

Those who buy and sell investments with any degree of regularity or frequency are actually speculators. And those who panic when markets fall, selling their investments and fleeing to bank accounts and money market funds, and who are flush with greed whenever the markets rise, racing to buy the very assets they previously sold, are market timers.

In fact, lots of people are market timers, although most deny it. Legendary money manager Peter Lynch had such individuals in mind when he said, “Far more money has been lost by investors preparing for corrections or trying to anticipate corrections than has been lost in corrections themselves.”

To make a profit when investing, all one needs to do is buy low and sell high. However, during the last three years, just the opposite happened: Many people who had eagerly bought shares at the high prices of the late 1990s sold them in the early 2000s at much lower prices – a classic case of buying high and selling low. These folks, currently on the sidelines with their cash, will one day buy the shares they previously sold, at prices higher than what they had earlier sold them for. Amazingly, most of these people will always wonder why they never make any money from their investments.

Even those who have resisted the urge to sell are acting a bit like market timers. While many of these folks are “holding on” (as they like to phrase it), they have stopped their systematic monthly investment programs or have switched from investing monthly into securities and are instead placing that cash into bank accounts. Ask them why, and they’ll tell you they’re just waiting for the market to become more attractive.

That attitude, of course, is pure folly. These folks were happy to invest monthly while prices were high, and they agree that prices will one day be high again (how else can you explain their willingness to keep the shares they already own?), but they are unwilling to invest new money at what they acknowledge are today’s temporarily low prices.

No matter how much we advisors promote dollar cost averaging and systematic investing, no matter how much we preach the long-term mantra, too many people insist on buying only when prices are high and rising.* Anytime prices are lower, they freeze. Can you imagine a shopper acting this way? “I’ll buy that suit only when it’s expensive. I’ll wait until the sale is over before I buy it.” Silly indeed.

In the late 1990s, many people lamented that they had not invested years earlier – when prices had been much lower. We find ourselves at a similar point in history. One day, you will tell your children and grandchildren that you had the opportunity to buy shares in the early 2000s. You will either be bragging to them that you did or bemoaning the fact that you didn’t.

* Dollar cost averaging does not assure a profit or protect against a loss in a declining market. For the strategy to be effective, you must continue to purchase shares in both up and down markets. As such, an investor needs to consider his/her financial ability to continuously invest through periods of low price levels.