Professor Burton Malkiel of the Rebalance Investment Committee explains how market timing leads to emotional trading and, all too often, portfolio-crushing mistakes that diminish retirement investment returns. More on smart investing.
I think one of the cardinal rules of investing is “Don’t try to time the market.” And the reason is that you’ll never get it right. I’ve been around this business for 50 years and I’ve never known anyone who could time the market, and I’ve never known anyone who knows anyone who could time the market. You can’t do it. It’s very dangerous. And in fact, what makes it particularly dangerous is it’s not simply that you don’t know how to do it. It’s that when you do it, your emotions get behind you and you’re more likely to get it wrong than right.
What we know people do is they tend to put money into the stock market when everyone’s optimistic. And when everyone is pessimistic, they tend to take money out of the stock market. More money went into the stock market in the first quarter of 2000, which was the top of the Internet bubble, than ever before. And what it went into was into Internet stocks and into funds that bought Internet stocks. And then the money came out in 2002 and early 2003, that was at the bottom of the market, exactly when it shouldn’t have come out. And then, in the third quarter of 2008, during the height of the financial crisis, more money came out of equities than ever before. People were taking money out by droves. And that was exactly when they should have been putting money in.
And so, when people try to do it, we have abundant evidence that it’s not simply that they get it wrong randomly. They do exactly the wrong thing. Don’t try to time the market. Nothing could be more dangerous. You’ll never get it right, and you’re more likely to get it wrong than right.