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The Best Time to Invest Was Yesterday: Timing the Market

By Sean Condon, CFP^®

Market volatility spiked in early August to one of the highest levels in history as the VIX Index (a widely used measure of volatility) briefly hit 65.  This is the third highest reading in over twenty years, behind only the volatility peaks hit during the 2008 Financial Crisis and the 2020 COVID pandemic.  With this volatility, the S&P 500 Index quickly fell 9% and yet, as of this writing, has climbed nearly all the way back in two short weeks.

It is entirely possible that the market rebound does not last, and future declines lie ahead.  However, it is also possible that years from now no one will even remember this extreme yet brief spike in volatility or what may have caused it.

Commenting on weekly moves in the market is often futile because things can change so quickly.  But moments like these are a good reminder of lessons in investing that remain timeless.

In this article, we explore why timing the stock market is so difficult and offer other investment planning strategies you can implement to succeed.  In a few years, the events of August 2024 will be far from investors’ minds and the intro to this article will seem very stale.  However, change the dates and the figures and the lessons will endure.  As the late Nobel Prize winning economist Daniel Kahneman observed: “The average investor’s return is significantly lower than market indexes; due primarily to market timing.”

Market Timing Is Consistently Inconsistent

Timing the market can certainly work sometimes, but it is far from perfect.  Not only do you have to decide when to sell, but you then must make a second decision of when to get back in.  That means for every gain, you must be right twice to make timing the market worth it. Unfortunately, market bottoms can only be truly spotted in hindsight, and timing the market is often closer to playing the lottery than it is to a formidable strategy.

A famous study by Morningstar shows what happens if you miss just the ten best days in the market.  An investor who missed the ten best days in the market between 1994 and 2023 would have earned 54% less than someone who was fully invested during the same period.  These best days often occur during the worst times, making it especially difficult to have courage to buy back in.  Half of the fifty best days happened during a bear market.  On the surface this may sound surprising but remember that large gains in the stock market often come on the heels of large declines.

Stretching the data further, someone who missed the thirty best market days would have earned a whopping $150,874 (83%) less than someone who stayed fully invested. The research is based on a $10,000 initial investment, but these numbers would be much more dramatic if you were dealing with a $100,000 or even a $1,000,000 portfolio.

Timing the Market Is Expensive

Timing the market can also be expensive.  Depending on your account type, asset class, and where you are executing your trades, you could be paying exuberant and unnecessary taxes.

If you held the assets for less than a year, your gain will be taxed as ordinary income at your marginal tax rate, which can be as high as 37% for high-income earners.^[1]  Long-term gains are taxed at a preferential rate. Regardless of your tax rate, your market timing must still be right often just to cover the tax cost of your transactions.

You Will Miss Out on Compound Growth & Market Rebounds

A recent study by Schwab Center for Financial Research found that poor market timing is worse than investing immediately, regardless of the market conditions at the time of investing.  This indicates that even in market downturns, or just before a downturn, investors who invest immediately and remain invested will be better off than those who stay on the sidelines or attempt to time the market.

The graph below shows just how much more a fully invested portfolio earns over the course of 19 years.  It would earn approximately $14,000 more in growth than a portfolio with bad market timing, and $91,000 more than a portfolio that stays in cash.  The only investor who performs better is the one with perfect timing—but since we already know that perfect timing is impossible, investing immediately is the next best strategy.

Optimize Your Opportunities for Growth

Timing the market is not a viable investment goal.  But you can still be strategic and active in your investments.  Here are a few strategies you might implement around market volatility that do impact your future.   

Rebalancing. Rebalancing means selling some of your better performing investments and buying a bit of your laggards (“sell high” and “buy low”).  Even in a difficult year when there are few “sell high” candidates, some investments will have done better than others, even if they are both down temporarily.  This can provide an opportunity to focus investments on what might have the better upside opportunity as things turn around.

Use market declines as an opportunity to harvest tax losses. A downturn in prices is not what we hope for when investing.  But one way to make lemonade out of those lemons is to sell securities that are down from their purchase price.  By “harvesting” those realized losses they can be used to offset taxable realized gains.  This tax-saving strategy can be helpful today and possibly for many years into the future, since realized capital losses can be carried forward on your tax return.  As we harvest losses, the proceeds from those sales are used to purchase investments in a similar category, so your portfolio allocation and opportunity to catch an upswing stay intact.

Confirm an appropriate “emergency fund.” One of the best strategies to help you sleep at night and allow yourself to stay invested during market volatility is to establish an “emergency fund” of cash left out of the market.  We collaborate with clients to make sure they have an appropriate amount of cash set aside to fund either spending needs or just as an emergency fund.  This is something we can discuss with you if it is an area of concern.

Revisit financial planning and/or cash flow projections. By reviewing how your resources will support cash flow needs into the future, we can help ensure that your spending should be sustainable.  And if making changes to expenses in the near term would be advantageous, that could be a positive step to take during a challenging time.  Reviewing scenarios for how the future may play out can be extremely helpful in creating the appropriate context for making decisions today.

Consider a Roth IRA conversion. Roth conversions offer the opportunity to transition investments from a traditional tax-deferred IRA account to a Roth IRA, where they will benefit from tax-free growth going forward.  The conversion will be taxable, but a market downturn could be a suitable time to make this transition with assets that have fallen in price, as their subsequent growth when the market recovers will be in the tax-free Roth IRA.

Take breaks from the 24/7 news cycle. We encourage you to take time away from the news and daily updates.  The constant news feed is focused on getting attention and benefits advertisers, not investors.  It can be overwhelming to the viewer, and that can lead to unnecessary stress and anxiety.  It is important to stay both physically and mentally healthy so you can make the best decisions for your overall benefit.

If you want to make drastic moves in your portfolio related to market events that you have no control over, try making a list of all the things you do control.  How much you are saving, evaluating the way you invest, spending less, where you aim your focus and energy.  Just imagine what kind of positive impact this may have on your life.  We can assure you it will have a beneficial one to your portfolio.

If you are interested in discovering how we can support you through market volatility and concerns about market timing, do not hesitate to get in touch.  Call (844) 377-4963 or email windgate@windgatewealth.com. You can also book an appointment online here.

^[1] Applicable on taxable accounts

Perritt Capital Management, Inc. is the registered investment advisor for Windgate Wealth Management accounts
All investments carry some level of risk, including the potential loss of principal invested.

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