Don't put your emotions in charge of your investments
Market timing can be a dangerous habit. Pullbacks are hard to time and strong returns often follow the worst returns. But often investors think they can outsmart the market—or they let emotions like fear and greed push them into investment decisions they later regret.
In fact, an important issue almost all investors face is
letting human emotion and bias rule their investment decisions. A look at historical net flows of mutual funds into the U.S. market shows that money flows into the market when prices were near peaks, and outflows when prices were near troughs. These flows tend to happen after the peak or trough occurs, thanks to badly-timed and often emotionally-driven investment decisions.
Chart: A sobering reminder of the potential costs of trying to time the market. Even missing a handful of days in the market can have a devastating effect on an investor’s total returns.
Action Point: Stay invested. Thanks to the rash decisions, the average investor stands to possibly lose significant potential returns the longer they are out of the market. Our analysis
shows that while the actual loss from missing a number of top returning days may be small, the implied compounding loss from not being in the market can become quite significant.
