Introduction Investing is a journey, not a sprint. At SciVest, we believe that building wealth is...
Introduction
The advice "buy low, sell high" is often seen as a straightforward investment strategy, but it leads to the risky practice of market timing, where investors attempt to predict market movements to optimize returns. While the idea seems appealing in theory, market timing is difficult to execute successfully, as it is prone to practical failures, emotional decision-making, and missed opportunities that can hinder long-term wealth accumulation.
Rather than trying to time the market, we emphasize a disciplined approach to investing. This includes maintaining consistent exposure to markets, diversifying across asset classes, and staying focused on long-term goals rather than short-term market fluctuations.
The Illusion of Predictability in Market Timing
Market timing isn't just about making one perfect decision, it requires a series of precisely timed moves. Specifically, it requires investors to:
- Sell out of the market or near its peaks just before a downturn
- Re-enter only once the market begins its rebound or recovery run
The challenge of predicting both the peak and the bottom of the market, which is trying to forecast two major turning points, makes market timing a highly difficult strategy. The probability of being successful timing both forecasts correctly is very low. Even institutional investors, who have access to advanced analytics, research, and data, find it nearly impossible to execute this strategy successfully over the long term.
This makes market timing a highly unreliable approach for sustained investment growth.
Quantifying the Cost of Missed Market Days
Empirical studies highlight the significant negative impact of trying to time the market.
For example, data from J.P. Morgan Asset Management (2023) shows that an investor who stayed fully invested in the S&P 500 from 2003 to 2022 would have turned a $10,000 investment into $64,844 - 9.8% return. but missing the 10 best trading days cut the return by more than half, to $29,708.
In our case study, where our goal was to quantify the cost of missing out on the market’s best-performing periods. Using data from 1990 to 2024, we show how a $10,000 investment would have grown if fully invested throughout all market downturns versus what happens when investors miss just a handful of the top-performing months.
This exercise - similar in spirit to J.P. Morgan Asset Management’s “Cost of Market Timing” study - highlights that missing only a few of the best months significantly erodes long-term returns.
In fact, missing just 5 of the 408 months (34 years) reduces ending wealth by more than 40% in both Canadian and U.S. equity portfolios, with the gap widening further as more top months, in 5-month increments, are excluded.
The chart below illustrates this compounding impact, reinforcing the importance of staying invested through market volatility.
Interestingly, these high-return days tend to occur most often during periods of high market volatility, which makes predicting them not only highly unlikely but also contrary to the typical emotional reactions investors have during crises.
Finally, a recent Forbes article, How Market Timing Risks Your Returns and What To Do Instead, highlights that even elite hedge funds frequently fail to consistently outperform benchmark indices simply by trying to time the market.
Emotional Drivers and Cognitive Distortions in Investor Behaviour
Market timing is notoriously difficult not just for technical reasons, but is deeply influenced by powerful emotional biases. To name the top 2, fear often drives panic selling in downturns, while greed can push investors to chase market peaks - leading to inflated entry costs and greater risk.
Behavioural finance explains these tendencies: loss aversion makes losses feel more painful than equivalent gains, encouraging fear-driven decisions, while herding behaviour causes investors to mimic others instead of relying on fundamentals.
As evidence, Wealthsimple’s review of investor activity during the March 2020 COVID-19 drawdown revealed a tendency among Canadian investors to to sell their positions at market lows. This decision cost them the opportunity to benefit from the rapid, V-shaped recovery that followed, underscoring how emotional responses can derail long-term investment success. (You Probably Shouldn't Panic Sell to Avoid Drawdowns).
Historical Evidence: Lessons from Crises
Beyond individual investor behavior, history provides clear evidence of how staying invested has consistently outperformed attempts at market timing during periods of crisis.
Black Monday (1987)
In a single day, the Dow Jones dropped 22% the steepest one-day decline in history. Yet within two years, markets had recovered, highlighting how even extreme shocks can reverse quickly.
Dot-Com Crash & Recovery (2000–2002)
The bursting of the tech bubble erased nearly 80% of the Nasdaq’s value from 2000 to 2002, prompting widespread investor capitulation. Those who stayed invested, however, participated in a powerful rebound: the Nasdaq more than doubled between 2002 and 2007
The Global Financial Crisis (2008 to 2009)
Investors who maintained allocation through the crisis captured robust post-recession appreciation. Conversely, those who liquidated assets frequently re-entered at suboptimal levels, reducing long-term returns.
Pandemic Recovery (2020)
The S&P 500’s rapid ascent, exceeding 70 percent between March and December 2020, defied conventional forecasting models. Those attempting to sidestep volatility through market exit missed one of the most pronounced short-term recoveries in modern financial history.
If the evidence against market timing is so strong, why does the belief in it persist? Part of the answer lies in how success stories are presented - and how failures are forgotten.
Media creates illusions of Market Timing Success
Popular media often highlights stories of investors who timed the market perfectly, but these narratives ignore the far more common failed attempts. This is classic survivorship bias - spotlighting rare wins while overlooking countless losses, giving a distorted view of the strategy’s effectiveness.
Financial news cycles add fuel to the problem by amplifying short-term movements and stoking FOMO (Fear of Missing Out), which pushes investors to chase headlines rather than follow a disciplined, long-term plan. While such coverage may grab attention, it rarely offers a sound basis for investment decisions.
The Embedded Costs of Market Timing
Market timing ultimately makes investing more expensive and hampers long-term wealth accumulation due to its hidden costs.
- Transaction Costs
Frequent rebalancing of your portfolio leads to higher trading fees and spreads, which can add up quickly, especially in active accounts. - Tax Impact
Short-term capital gains are taxed at higher rates, meaning that frequent trading can lead to a bigger tax bill. - Mental Fatigue
Constantly watching and adjusting your investments takes up a lot of mental energy, and often, these efforts don’t result in better returns, sometimes even leading to worse performance.
These hidden costs slowly eat away at your investment returns. On the other hand, a passive, strategically allocated portfolio tends to have lower fees and less mental stress, leading to better long-term wealth accumulation.
Practical Alternatives to Market Timing
Dollar-Cost Averaging (DCA)
Dollar-Cost Averaging means investing a fixed amount at regular intervals, regardless of market conditions. By investing on a recurring schedule and thus automating contributions, DCA removes the stress of guessing entry points and fosters consistency. It smooths out purchase costs, reduces the impact of short-term volatility, and helps investors stay disciplined by avoiding emotional, reaction-driven trades.
Strategic Asset Allocation
Strategic Asset Allocation (SAA) is a foundational investment strategy that involves constructing and maintaining a diversified portfolio based on long-term financial goals, investment horizon, and individual risk tolerance (Learn more: Mastering Strategic Asset Allocation).
Conclusion: Go for Patience and Process
Market timing not only fails statistically but also adds unnecessary stress, costs, and complexity. Resilient investing comes from evidence, discipline, and patience, not prediction.
History and behavioural research point to the same lesson: investors who stay invested, rebalance consistently, and follow a strategic framework build stronger, more sustainable wealth than those who chase short-term moves. Market timing mistakes are not inevitable - they are avoidable with the right process.
At SciVest, we help investors put this discipline into action. By aligning portfolios with long-term goals, risk tolerance, and proven principles, we focus on building wealth the smart way: through patience, not prediction.
