Recently, I’ve been playing around with a penny stock as a form of entertainment. I invested a bit of money as a gamble, was happy to see that it paid off. My money doubled, and I sold. Had I left it in, it would have doubled again. This reminded me of an important investing lesson: timing the stock market is a fool’s game.

Why Timing the Market Will Burn You

Trying to time the market is sexy (well… as far as investing goes, anyway). It gives you gunslinger stories to tell with your investing buddies, and it feels good when you get it right. Unfortunately, most people get it wrong more often than not.

First off, proper market timing is based on information and analysis. And do you think you’re the only one trying to do it? How about institutional investors? Do you think that you’ve get access to better, faster information than the best of the best out there that are investing billions of dollars at a time?

Sorry friend, ya don’t.

It’s crazy-talk to think that you are more informed than people whose job it is to be the best-informed in the business. They have access to tools and insights that the average person can only dream of. We can’t out-time the pros. So where does that leave us?

In a word: guesswork.

And you don’t want to be guessing. You might miss some bad days, sure, but you might also miss the good ones… and that can obliterate your returns. Below is a chart that shows what happens if you miss the 5, 10, 30 and 50 best investing days in the 28-year period from 1990-2018.

As you can see, missing the 5 best days drops your overall return by 35%. Missing the top 10 days will more than halve your long-term returns. And it just gets worse from there.

What to Do Instead

You’re much better off picking good strong stocks or funds and holding them for the long term. Is it sexy? No. Is it likely to get your better overall returns than if you try to be a market-timing gunslinger?

You betcha.

Remember that penny stock I was talking about? I put $1,500 into it, and it turned into $3,000. Then I sold, ultimately buying back in again later, when I realized it wasn’t going to stop going up. That $1,500 is now worth $5,500 today, for a 266% return in 6 months.

“Great Jason, so… where’s the lesson? Sounds like you killed it.”

Sure, it does sound like that, until you consider that, had I just left my money in place the whole time, that $1,500 would instead be worth $12,075, for a total return of over 700%.

…Ouch.

It hurts even to write that. I missed some of the stock’s best days, and my return was slashed down to a third of the stock’s actual return over the same timeframe. So learn your lesson from my example, the easy way, and just buy and hold. It’s less work, less stress, and more rewarding.

Wrapping it Up

It doesn’t matter whether it’s an index fund, a mutual fund, an ETF or an individual stock; buying and holding for the long term is an almost guaranteed way to outperform most of your peers. Besides… there are plenty of sexier topics to talk about at dinner parties than investing 🙂