Market Timing vs. Buy-and-Hold Investing
Why Market Timing is Difficult
The fact is that the market is an incredibly complex system. Investment returns depend on a wide range of factors — from who the company’s chief executive officer is to inflation in China. Economists suggest that stock price changes exhibit what they call random walk behavior, meaning that future performance cannot be predicted based on past performance.
Market timers retort that they have built complex models that analyze all factors affecting a stock’s price. Sometimes, these models do accurately predict the movement of a stock price. But too often, unforeseen factors can quickly send a stock’s price up or down.
Also, market timing is a more time-intensive strategy. You need to monitor your investments closely to stay on top of all factors that can affect them.
Buy and Hold
For the average investor, a buy-and-hold strategy is much more practical. While buy-and-hold investors will suffer in market downturns, by staying invested in the market, your investments will recover when the market recovers. While there is no guarantee that will happen, historically, the general direction of the market has been upward.
The benefits of a buy-and-hold strategy over a market-timing strategy include:
- It doesn’t require constant monitoring of the market or the news.
- It’s less complex. You’ll typically make far fewer trades with a buy-and-hold strategy.
- There are fewer tax consequences. Since you have fewer trades, you’ll have fewer taxable transactions.
If you’d like to discuss a buy-and-hold strategy in more detail, please call.