The Truth About Timing the Market

Every investor has felt it. That urge to sell everything right before a crash. Or the burning certainty that now-right now-is the perfect moment to buy.

Market timing is seductive. The promise of buying low and selling high sounds like common sense. But decades of research and real-world data tell a different story. One that most investors don’t want to hear.

What the Data Actually Shows

A 2021 study by Dalbar Inc. found that the average equity fund investor earned 5. 96% annually over 20 years, while the S&P 500 returned 7. 43% - that’s not a small gap. On a $100,000 investment, the difference compounds to roughly $89,000 in lost returns over two decades.

Why the underperformance - investor behavior. People buy when markets feel safe (after they’ve risen) and sell when fear takes over (after they’ve fallen). The exact opposite of what timing strategies require.

Charles Schwab conducted research examining five different investment approaches from 2001 to 2020. They tracked hypothetical investors who each received $2,000 annually:

• Perfect timer: Invested at the market’s lowest point each year
• Immediate investor: Invested on January 1st
• Dollar-cost averager: Spread investments across 12 monthly purchases
• Bad timer: Invested at the market’s peak each year
• Cash holder: Kept everything in Treasury bills

The results? Perfect timing beat immediate investing by only $5,000 over 20 years. Meanwhile, even the worst timer-someone with genuinely terrible luck-still accumulated $105,000 more than the cash holder.

Think about that. Two decades of perfectly wrong timing still beat sitting on the sidelines.

Why Smart People Fail at Market Timing

Professional fund managers struggle with this too. S&P’s SPIVA scorecards consistently show that over 15-year periods, roughly 90% of actively managed large-cap funds underperform their benchmark index. These are professionals with Bloomberg terminals, quantitative models, and teams of analysts.

They still can’t reliably time markets.

The fundamental problem is mathematical. Successful market timing requires being right twice: once when exiting and once when re-entering. Miss either decision, and returns suffer.

Bank of America analyzed S&P 500 returns from 1930 to 2020. Missing just the 10 best trading days each decade dropped average annual returns from 9. 9% to 4 - 5%. Missing the best 20 days - returns fell to just 1. 6%.

Here’s what makes this brutal: the best days tend to cluster near the worst days. Eight of the ten best trading days in the last two decades occurred within two weeks of the ten worst days. An investor who panics and sells during a crash often misses the sharp recovery that follows.

The Buy-and-Hold Alternative

Warren Buffett’s famous advice to investors is simple: “Our favorite holding period is forever. " His reasoning isn’t philosophical-it’s practical.

Buy-and-hold investing works because it removes the two decisions that sink most portfolios. There’s no need to predict tops or bottoms. No requirement to time entries or exits. The strategy acknowledges what the data shows: time in the market matters more than timing the market.

Vanguard’s research on portfolio outcomes found that asset allocation explains roughly 88% of a portfolio’s return variability over time. Market timing and security selection? They account for a combined 12%.

For FIRE-focused investors, this has specific implications. The 4% rule-which suggests withdrawing 4% of a portfolio annually in retirement-was developed by Bill Bengen using historical data that included some of the worst market conditions in American history. His research assumed investors stayed invested through crashes, recessions, and recoveries.

The math works over long periods. But only for those who remain invested.

When Timing Arguments Fall Apart

Critics of buy-and-hold often point to specific scenarios. What about Japan’s lost decades? What about investors who bought right before the 2008 crash?

These arguments deserve honest consideration.

An investor who put $10,000 into an S&P 500 index fund at the absolute peak in October 2007-the worst possible moment-would have seen. Investment fall to roughly $5,000 by March 2009. Painful - genuinely difficult to endure.

But that same investment, held through the recovery, was worth approximately $38,000 by late 2021. A 280% return despite starting at literally the worst time in 15 years.

Japan presents a different case. The Nikkei 225 still hasn’t recovered its 1989 highs. This is often cited as proof that buy-and-hold fails. What the argument ignores: a globally diversified portfolio during that same period performed well. Japanese investors who held only domestic equities learned a lesson about concentration risk, not about the failure of long-term investing.

Geographic diversification solves problems that market timing claims to address.

The Psychological Trap

Behavioral finance research by Daniel Kahneman and Amos Tversky identified a phenomenon called loss aversion. Humans feel losses approximately twice as intensely as equivalent gains. A $1,000 portfolio drop causes more psychological pain than a $1,000 gain causes pleasure.

This asymmetry drives poor decisions. Investors sell during downturns to stop the emotional pain, then wait too long to re-enter because they’ve anchored to the lower prices they saw. By the time a recovery “feels” safe, much of the rebound has already occurred.

Morningstar’s “Mind the Gap” studies repeatedly show this pattern. Investor returns lag fund returns because of timing decisions driven by emotion rather than analysis.

The uncomfortable truth: successful investing often feels wrong. Buying when headlines scream panic - holding when instincts demand action. Doing nothing when everyone else is doing something.

A Practical Framework

None of this means investors should ignore market conditions entirely. A sensible approach includes:

Regular rebalancing: When stocks surge, trimming back to target allocation locks in gains. When they crash, buying more at lower prices happens automatically. This is rules-based selling high and buying low-no forecasting required.

Dollar-cost averaging: For those with lump sums to invest, spreading purchases over 6-12 months reduces the risk of unfortunate timing while getting money working relatively quickly.

Maintaining appropriate asset allocation: A portfolio’s stock/bond mix should reflect actual risk tolerance, not theoretical comfort. Investors who sell during 30% downturns probably held too much equity for their genuine risk capacity.

Building cash reserves outside investments: Emergency funds prevent forced selling at the worst times. Three to six months of expenses in accessible savings creates options.

The goal isn’t to time markets perfectly. It’s to build a system that doesn’t require perfection.

What Actually Matters

For investors pursuing financial independence, the biggest variable isn’t market timing. It’s savings rate. An investor saving 50% of income reaches financial independence in roughly 17 years regardless of market conditions. Someone saving 10%? About 51 years-and far more dependent on strong returns.

Controlling spending, maximizing income, and investing consistently matter more than any tactical decision about when to buy or sell. These factors are within an investor’s control. Market movements are not.

The evidence on market timing is clear. Not mixed - not debatable. Decades of academic research, professional fund manager performance data, and real investor outcomes all point the same direction.

Most investors would be better served by setting an appropriate asset allocation, investing regularly, rebalancing periodically, and otherwise doing as little as possible. The strategy lacks excitement. It generates no cocktail party stories about brilliant trades.

But it works.