A bear might say, “Sell your stocks, the market is about to tank!” Whereas a bull may say, “Buy now, the market is about to shoot higher!” The truth is that nobody can predict exactly when the market will go higher or drop, so this thinking is what I call “crystal ball syndrome.” People think they can see and predict the future, but the truth is that they can’t.
Yes, the market does drop sometimes and some people might get lucky enough to sell right before a drop or buy right at the bottom of a dip, but there are many people who fail.
I personally used to have this syndrome. I invested pretty heavily into individual stocks and would try to time the market. Although this crystal ball syndrome afflicts many people who purchase diversified index funds, I was purchasing individual stocks when it afflicted me. Some picks like Apple in mid-2013 proved to be well timed picks and boosted my ego, but overall it wasn’t worth the effort.
In contrast, nowadays the percentage of my portfolio invested in individual stocks is well under 1%. I also don’t try to time the market with any stock purchases anymore. So what changed?
I realized I didn’t and wouldn’t ever have a crystal ball.
Over the time that I invested in individual stocks, I built a well diversified portfolio that mostly beat the S&P 500. I’d only trade stocks a few times per year to minimize trading fees (I now avoid fees with Robinhood) and held some stocks for years once purchased. Even though I only traded a few times per year, I tried to time things well when I did trade. This often led to cash sitting in the bank a little longer.
Beating the S&P over a few years made me feel pretty high and mighty, but I said “mostly” earlier because this didn’t last forever. By the time I got out of investing in individual stocks, I had fallen very slightly behind the market. Overall, these were still good gains though.
How do much I attribute my gains to the timing of the stock purchases?
Nearly none. Yes, I happened to time my purchase of Apple stock well, but a single instance isn’t a huge deal. Simply purchasing Apple stock anytime within the same year that I purchased it would have provided pretty exceptional returns. Compare this to how much effort I spent watching stocks to try to time things well – it was quite a bit of wasted effort.
Let’s also mention the fact that I was building up cash to invest in the market only a few times per year. Although I haven’t gone through the effort of proving this – if my money had been invested more regularly, I likely would have made more money because cash sitting in my bank made essentially nothing.
What would I recommend doing instead?
Set up automated investing into a diversified fund (ie. a S&P 500 index) and stay invested. There is always a good amount of talk that the market is heading for a correction. However, this is an attempt to time the market and I don’t recommend trying to bother to time the market – neither you nor I have a crystal ball.
Start investing now because today is a good day to invest. Not because I think the market is going to shoot up today or tomorrow. Instead, today is a great time to buy because stocks pretty much always go up in the long run, so it should be headed up from here.
If you buy individual stocks, don’t do so because you think you’re purchasing a stock at the perfect time. Only buy individual stocks that you believe (based on evidence beyond a gut feeling) are strong stocks, not because the timing seems right.
So rather than staring at my computer or phone to try time the market, I think I’ll just shake my snow globe and enjoy watching it for a minute. Meanwhile I’ll enjoy knowing that my automated monthly investments will probably make me more money than most people who think they have a crystal ball.