Yesterday, Austin quoted Warren Buffett saying, "Sir Isaac might well have gone on to discover the Fourth Law of Motion: For investors as a whole, returns decrease as motion increases." This idea that investors cost themselves money through their attempts to time the market should be a familiar idea to SMI readers. We've written about this many times in many ways over the years, most recently this month in our article showing that even perfect timing of new purchases produces only a slight benefit.
Many studies have looked at this and come to similar conclusions: most investors tend to be terrible timers and their returns suffer as a result. Morningstar provides the latest exhibit along these lines with their "Mind the Gap 2014" study. In it, they show that over the past 10 years, the average fund investor earned just 4.8% annualized, while the funds they used gained 7.3% annualized. Their conclusion: fund investors as a whole cost themselves about 2.5% per year trying to time their exits and entries.
It's worth noting that an Upgrader who never tried any market timing maneuvers at all over the past 10 years would have earned 9.4% annualized, very nearly double what the average fund investor earned after trying to weave and dodge around the bad periods. One would think that would be enough to end the discussion and turn all Upgraders into iron-bellied followers through thick and thin. Despite this, we know from experience that there are many Upgraders who will still try to amateur market-time their way to higher returns.
Consider this a public service announcement that it's a bad idea. If you must take some kind of action when the stock market gets scary, at least make it disciplined, pre-determined action that's built into your long-term plan. Our Dynamic Asset Allocation strategy is great for that, because it shifts away from stocks automatically during perilous times, which is exactly what most people want to do anyway when they're engaging in these types of amateur timing decisions. The virtue, of course, is that it happens on an un-emotional, mechanical basis that has been extremely effective in the past. That's a significantly better approach than flying by the seat of your pants, which is typically what most investors resort to as the market falls.
Much better to devote part of your portfolio to a disciplined system like DAA than to attempt to make timing decisions on your own. One is winging it, the other is building the very emotional release most amateur timers seek right into the fabric of their plan. Yes, doing so takes the decisions of when to exit and enter the asset classes out of their hands. But hopefully it's clear by now why that's a very desirable thing, not a drawback.