Myths & Breakthroughs

4 Market Timing Myths That Support the Buy-and-Hold Mentality

Most investors are told that market timing is impossible and dangerous. The industry insists the surest way to avoid losses and increase the chance of gains is to buy and hold through good and bad times, regardless of the market's behavior. Investors ride out the market's highest highs and lowest lows because the clutter, which includes misinformation, has convinced them that timed selling is irrational, irresponsible and will lead to failure. This philosophy is based on four central myths.

Myth 1: The Market Will Eventually Recover All the Way, Every Time

This philosophy operates on the assumption of a speedy recovery following a crash. The problem, however, is that recoveries are often long, painful, drawn-out affairs. Across history, recoveries don’t always happen. Greece currently may not recover, and that would put them in the category of Tulips (1637), The Roman Empire, and many others.

The Great Depression, for example, resulted in losses of 89 percent. An investment of $1 million was reduced to $110,000. Yes, the market recovered, but it took 25 years to get back to where it was, to the point where investors could again begin making money.

When savvy money managers offer this example as a counterargument to buy and hold, they are inevitably told that the Great Depression was an outlier—a fluke that is outside the norm. The problem is, major crashes with long, difficult recovery periods are not uncommon at all, especially when it comes to global markets.

Markets in Japan, for example, are currently down roughly 60 percent since 1988. Investors who bought and held in 1988 have waited 28 years for a recovery that still hasn't arrived.

Myth 2: You Can't Time the Market Because No One Can Predict the Future

It is, of course, true that no one can predict exactly what will happen tomorrow. But what if investors in Japan's plummeting markets had evacuated when the market was down 10-20 percentage points in 1988 instead of trying to ride out the coming storm?

If their exit had been based on verifiable sell signs and discernable patterns based on moving averages, and thresholds below market peaks, (which we can then get potential odds on historically in the U.S.) then they wouldn't have been trying to time the market. They would have been strategically leaving a toxic environment. If it is possible strategically to exit the market, then it is also possible to re-enter it strategically, which leads to the next myth.

Myth 3: You'll Sell at the Bottom and Miss the Big Recovery

There is simply no scientific evidence to support the assumption that all investors are irrational1 and that if they sell, they will surely, (predictably), sell at the bottom and compound their losses. Yes, a skittish, emotional investor could sell after suffering modest losses only to realize they pulled the trigger too early and exited at the bottom of what turned out to be only a minor correction.

On the other hand, clear, discernable signals could spur perfectly rational investors to exit after sustaining small losses, relocate their money to safety and possibly sidestep the bulk of a major crash.

Myth 4: It is Impossible to Make Accurate Predictions

More than any other supporting argument for buy-and-hold investing, this reveals the hubris and presumptuous thinking of some of the financial industry's product packaging establishment. They have no problem making their own predictions that recoveries will be swift, that investors will sell at the bottom and that those who sell will miss the recovery.

Yet investors and their portfolio managers are rarely afforded the same leeway in making predictions of their own—even when predictions regarding imminent crashes and probable recoveries are based on hard numbers and quantifiable trends such as the historical combination of moving averages and thresholds.

Buy low, sell high is one of the wisest and most basic investing principles. Unfortunately, many investors have been so spooked by buy-and-hold mythology that they don't buy low and sell high. In fact, they only buy and never sell, because they've been wrongly convinced that strategic selling is futile.

It’s vital that investors understand their portfolio and have the conviction to instruct their advisors that buy-and-hold may not be the direction they wish to take.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. It is not possible to determine the top or the bottom of the market. Investing in the market involves risk, including fluctuating prices and the uncertainty of return. There is no guarantee that the investment strategy discussed will be successful.

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