The Stock Market: How Wrong Timing Destroys Your Final Return

Updated: Jan 3

The stock market has more often than not the odds stacked against it. Being seen as a gamblers' marketplace, market timers who try to beat the market have a higher chance of missing out on the most lucrative days. In fact, wrong market timing has a devastating impact on your final return after taking into account the compound effect. If you go out and start investing, just buy stock and wait. Don't be the type of investor who thinks he can beat the market by timing accurately. It simply doesn't work. If you somehow managed to do this, your returns would have gone from 1,910% to 371%, or 6.7% a year to 3.4%. To give you an idea of how lousy that is, 1-month U.S. T-bills returned 4.9% over the same period.

It's self-explanatory that the average investor has significantly underperformed the broader market over the long run with annualized returns of approximately 2%. That's even worse than the 3.4% mentioned above. How come timing in the market is a much better approach than timing the market? It's because of emotional behavior and the whipsawing characteristics of the stock market. Its performance boils down to reacting to economic, political and corporate news. There's no such thing as consistency in the world of investing, unless you start selling options which relies heavily upon time decay. The daily changes in your portfolio are smoother, you capture less upside and downside risk but get a more fluent performance. Collecting a recurring income stream of positive daily theta makes it easier for you to stay in the game and compound wealth over time. Not letting emotions interfere with your portfolio/profits is of key importance to stay mechanical.


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