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The Sheer Folly of Market Timing Exposed (again!)

The Sheer Folly of Market Timing Exposed (again!)

November 05, 2020

Oh how the market so likes to make fools of us mortals.

All year there have been two things that investors have been agonizing over.  The Virus.  The Election.

Surely such a bitterly contested election would cause markets to swoon, right?  What if we don’t know the outcome on election day?  What if the results are challenged in court?  Surely markets will tumble on the uncertainty of it all, right?     

Generally I advised clients to stay put and put their political leanings aside.  I pointed out that there is absolutely zero historical correlation between which party wins the White House and subsequent stock market returns.  But I too worried a bit about this election…markets historically don’t like uncertainty, not knowing.  And it seemed very likely that results would be contested. 

Well…there you have it.  “It seemed very likely that….”  As soon as you utter those words, it is probably wise to assume that whatever “seems very likely” is already priced in by the markets.  Even uncertainty itself.  So here we sit today with uncertainty being the only certain thing about the election outcome, the epidemic spreading and getting worse – and markets rallied.  Why?  Well maybe leading up to the election, the market was worried about what might happen, now it HAS happened – and the market breathes a sigh of relief.  Why?  I don’t know, just because blue people and red people aren’t killing each other in the streets with pitchforks? 

Here then, is the problem with market timing.  Anyone who pulled money out of the market to “wait until things seemed safe” now has a difficult decision to make.  Wait for the next crisis to happen (maybe the pandemic will get much worse) or bite the bullet, reinvest, and move on.  (If that’s where you find yourself today…consider getting back in a little a time using “dollar cost averaging to avoid potential regret).

We as humans like to think we know what is coming next.  It makes us feel safe.  In addition, we often get very sure of ourselves. Men are especially prone to thinking they have it all figured out – just ask their wives!  But when it comes to investing, this election yet again demonstrates that the best course of action is to choose an appropriate, well diversified asset allocation based on your risk tolerance and financial plan, then just close your eyes and let history play out.  In fact, I have become certain of just one thing when it comes to investing – that the market’s ultimate goal is to make a fool out of anyone who tries to outsmart it.  And it is really good at achieving this goal.