Market Timing Is Silly

If you pay attention to the financial media, you'll see many experts predicting what the market will do in the near future and urging us to buy or sell "now." Unfortunately, they're often wrong. No one can consistently and accurately know what the market will do in the short term. In the long term, though, the trend is clear: The market rises.

In a famous study, University of Michigan finance professor H. Nejat Seyhun found that an investment held in the stock market from 1963 through 1993 (7,802 business days) would have yielded an average annual return of 11.83 percent. But get this: He found that if you were out of the market (i.e., not invested in it) for the 10 days when the market rose the most, your average annual return would be only10.17 percent. If you sat out the 90 best days, you'd be down to a mere 3.28 percent.

Much of the market's gains can occur on just a few days. So anyone who tries to time the market risks missing out on substantial profits. Some will argue that by being out of the market on the worst days, you'll improve your returns — but no one can correctly predict when those worst days will occur, either.

Another problem with market timing is that it can be expensive. It often means that you're getting in and out of various stocks rather frequently, leaving you with short-term capital gains (if you're lucky to have avoided losses) that are usually taxed at a higher rate than long-term gains. Frequent trading can generate a lot of commission costs, too.

Over the long run, it's usually more hazardous to your wealth to be out of the stock market than to be in it. By hanging on, you'll be in the market on days when it counts, able to ride out occasional downturns. A great strategy is to regularly invest in the market, no matter whether it's up or down, perhaps through an index fund. Learn more at www.fool.com/investing/ general/2008/09/03/are-you-afraid-ofthe september-curse.aspx and www. indexfunds.com.