Timing the market is for suckers. It’s often a wealth killer for the average investor

Whether it’s telling a joke, asking your boss for a raise or cooking the perfect meal, timing is everything. This is partly true for investing: Starting early and staying invested gives your money more time to grow through the magic of compounding. Where it falls apart is when it comes to trying to maximize returns by predicting market highs and lows. The research is clear: Timing the market is a wealth killer for the average retail investor.

It all comes down to knowledge, emotions and biases. Nobody can predict the future — even the world’s best investment managers — and the average person doesn’t have the time, energy or skillset to accurately and consistently pinpoint the best time to sell stocks before the market declines, or when to jump back in before it goes up again. On top of that, individual investors often make decisions based on their reaction to news stories, market volatility or the fear of missing out.

“By nature, we are prone to biases and we often let emotions get in the way of sound decision-making. Overconfidence in our investing abilities is one of the greatest biases we have,” says Stephen Foerster, author and professor of finance at the Ivey Business School at the University of Western Ontario in London, Ont.

Then there are the financial costs of trying to time the market through frequent trading, such as trading fees and commissions, tax liabilities from capital gains, plus the opportunity cost of missed returns or loss of income from dividend payments.

What contributes to wealth erosion

“Two of the biggest contributors of wealth erosion are unnecessary fees and taxation,” says Martha Adams, a certified financial planner and financial educator based in Guelph, Ont.

Cautionary tales of overconfident investors unsuccessfully trying to time the market date back hundreds of years, says Foerster. In his latest book, Trailblazers, Heroes, and Crooks: Stories to Make You a Smarter Investor, Foerster recounts a bad case of FOMO (the fear of missing out) that ended up costing famed mathematician Isaac Newton most of his wealth when he was swept up in the frenzy surrounding the South Sea Company.

“In 1720, [Newton] was invested in South Sea stock and in just a few months the stock price increased considerably, so he sold. But afterwards, he watched as the South Sea stock price continued to rise. So, Newton got back in at the worst time, just before a major drop in the stock price, causing him to lose the equivalent of millions of dollars,” says Foerster.

More recent research confirms that overconfidence and frequent trading is “hazardous to your wealth,” according to a study from the University of California, Davis, that examined the discount broker accounts of more than 66,000 households in the United States from 1991 to 1996. While overall market annual returns were 17.9 per cent, those who traded the most frequently earned an annual return of 11.4 per cent.