It's risky to try to time the market. And even you could do it perfectly (which you can't!) the upside isn't as great as you might think, as SMI executive editor Mark Biller explained yesterday on Moody Radio's MoneyWise Live.

To listen, click the play button below — or, if you prefer, scroll down for a transcript. (For more radio appearances by members of the SMI team, visit our Resources page.)

MoneyWise Live, with hosts Rob West and Steve Moore, airs daily at 4:00 p.m. ET/3:00 CT.

To ask a question on a future program, call 1-800-525-7000 and mention you have a question for either Mark Biller or Matt Bell of Sound Mind Investing.


Transcript

Steve Moore:  Most investors, even those committed to a "buy and hold" strategy have daydreamed about how wonderful it would be to "time" the market: selling just ahead of a downturn or buying before a surge would be great. Right? Well, as it turns out, not so much. Even if you could time the market perfectly, the benefit isn't what you'd expect.

Our host, Rob West sits down with investing expert Mark Biller to get the facts on  this man-bites-dog investing story. Then we take your calls at 800-525-7000. I'm Steve Moore. Glad you're with us for today's edition of MoneyWise Live.

And, Rob, indeed it's always great to have Mark Biller here. He's the executive editor over at soundmindinvesting.org — and he really does know his stuff when it comes to Wall Street and the markets. However, he's not all that artistic. In fact, his home owners association recently asked him to hide his pumpkin.

Mark Biller:  Oh, dear.

Rob West:  I don't know how he gets this insider information from an HOA.

Steve Moore:  It's on the web.

Rob West:  It's on the web. Got it.

Mark Biller:  Deep research.

Rob West:  Apparently. Hey, welcome back to MoneyWise Live!

Mark Biller:  Good to be here.

Rob West:  We're so glad you're here. And you know, we advise folks, as you do, not to try to time the markets because — well first it's impossible, but second, it's risky. But you have Mark, a fascinating new article on the Sound Mind Investing website that shows what would happen if you could do it. It's titled The Surprisingly Small Benefit of Perfect Market Timing — and it's definitely not what a lot of investors would expect, right?

Mark Biller:  Yeah, that's right. The reason that we wrote this article is because with a lot of the economic data kind of weakening and recent months, we know that some investors are thinking maybe it's time to scale back any new investing they might be doing — or even head for the exits altogether and just try to wait out the next bear market. But we know from studying market history that — long-term — stock investors prosper,\ because of their owning businesses over time. It's not the buying and selling of those businesses.

And if you think about that and more like local terms, it makes perfect sense. Think about the town that you live in and the people that own the businesses in that town. They do well because they own those businesses, not because they're brilliant at timing, the buying and selling of businesses in the town. And that's true of us as investors as well. The important thing isn't when you buy, it's that you buy and continue to buy.

Now we know it's one thing to just say that. And so in this article we wanted to create some examples that would help prove to our readers that timing just isn't as significant a factor as most people think.

Rob West:  Well, it's fascinating work and I appreciate you creating a case study in what this could actually — and does actually —look like, as we step into the Sound Mind Investing laboratory with some hypothetical investors. Why don't you set this up for us, Mark? What did you do?

Mark Biller:  Sure. So in the article we looked at a couple of different approaches. And in the first one, we just compared to investors who are putting money every year into an IRA. So each year these two investors put in the same amount.

The difference is that one is the world's best timer. Every year he invests his new money on the very lowest day of that year. The other investor just splits his contribution up evenly — invests the same amount on the last day of every month. Now, that latter approach may seem familiar to a lot of people. We call it dollar-cost averaging, and that's basically what most people do on autopilot in their 401(k) or other retirement plan.

So to be clear, in this first example, we're comparing perfect timing against simple dollar-cost averaging.

Rob West:  Okay. And these are our "pretend" investors, but the time periods you chose were very real. In fact, you set out to make this test pretty extreme. We've got just about 30 seconds, so we won't be able to give the data, but talk about how you approached the time periods.

Mark Biller:  Yeah. We wanted to make them extreme as you mentioned. So we chose three different 20 or periods and we set each one up so that they began right before a really significant big market crash. So we'll talk some more about the implications of that when we get back. But that's how we set up the example.


Rob West:  Two investors, both investing in their IRA the same amount. One is the world's best timer. He invests his new money on the very lowest day every year — as if you could pick that point. And the other investor just splits his contribution up evenly, invests the same amount on the last day of every month. So he's dollar-cost averaging with systematic investments.

Revisit the time periods and then give us the results.

Mark Biller:  Yeah, we really wanted the "worst of the worst" possible starting points for this experiment. So we started with a 20-year period right before the big bear market in 1973. Then we did another one and another 20-year period right before the Black Monday drop where the markets fell 22% in one day in 1987. And then we started a third period, right before the bursting of the dot-com bubble in '99.

So we've got these three different periods, and two things really stood out when we compared these two investors over those three periods. The first thing was that both approaches were very successful ins all three periods — despite these horrible starting points and these deep bear markets right out of the gate. So the worst result of all of these was a gain of about 7.5% per year. That is below the long-term average of the market, but it still isn't bad, especially since that period had two major bear markets in it.

And the second thing that that really stood out was that the impact of even this "perfect" timing — which as you pointed out, is completely impossible, bo one would ever be able to nail the absolute low every single year — but even if they could, that impact was pretty minimal. So over these 20 years, that that ability to perfectly time those contributions only added about 1% per year over the simple dollar-cost averaging approach.

So that was kind of surprising to us. And, and to further back up that point, the article also talks about another study that did a similar thing over 30-year periods comparing the the best day of each year to invest and the worst day of each year to invest. And in total, over these 30-year periods, it only amounted to about a 20%, 25% difference in the total returns. So much less than you would think.

Rob West:  Fascinating. And obviously one of the keys here is that even though you started with these precipitous drops prior to these bear markets, you had a time horizon of 20 years, which again reinforces the biblical principles we talk about related to "slow and steady" and having the right time horizon. If you've got 20 years on your side, then investing is the place to be, even with the ups and downs, right?

Mark Biller:  That's exactly right. And in fact even, the systematic investor actually benefits long-term from having stocks temporarily go on sale because they keep buying at those lower prices through those declines.

Rob West:  All right, so you put the money in right before the drop — but you actually pushed the envelope a bit further. Tell us about this one other tweak you made in the, in the study.

Mark Biller:  Sure. So our last test brings in the idea of someone who only bought at the market high immediately before each of these big bear markets we were talking about. So basically what we're saying, Rob, is this person only invested at the absolute worst possible times in history. So instead of putting his money in like the dollar-cost averager guy did on a regular basis, he saved up all his cash until we hit the absolute peak and then dumped his money in. Now, the one thing this poor guy did do right, was he never sold any of his holdings. But even [with] this impossibly bad timing, surprisingly, his total portfolio size and each of the three periods only ended up being about 25% below the dollar-cost averager.

Now, to be clear, don't misunderstand what I'm saying. It's not that a 20% or 25% gap in returns isn't significant — clearly it is. But the point is, we completely stacked the deck in a completely unrealistic way. And even doing that, we got these 80/20 rule type results, where 80% of the returns came from simply being present in the market. So that was pretty surprising result to us.

Rob West:  Well, this is fascinating, and it really does make the point here about the value of dollar-cost averaging. Now, I suspect that the person out there listening today who feels like they always buy at the absolute wrong time is wondering how you got a details on their investment strategy!

But, Mark, as you take a step back, what's the big thing this exercise teaches us above all else?

Mark Biller:  Yeah, I think the biggest thing, Rob, is that being consistent in your investing — which thankfully anyone can do — is a lot more important to your long-term success than your skill in timing the market, which very few people can do well. And that's why dollar-cost averaging can be such a powerful tool for the average investor, because it really points out that the key to success is willpower, not some kind of trick or timing system.

Rob West:  And Mark, here we are 10 years-plus, 11 years into a bull market. Why is it especially important to grasp this concept even today?

Mark Biller:  Well, I think it's really important because investors really have had a fairly easy emotional ride in stocks for most of this past decade, and eventually, we know the markets are cyclical and those market storms are going to return because they always do eventually. So when that happens, most investors emotions are going to become a lot more volatile. And when that happens, it's important to be focused on what your long-term strategy calls for, not some kind of pipe dream of figuring out when to time the market and what the market's going to do next — all this stuff that investors usually focus on at times like that.

So the great news is if you're investing every month in a 401(k) plan or something similar, you're already doing the dollar-cost averaging that we've been talking about. The key is to continue to follow through on that, assuming that you have a diversified portfolio that already is reflecting a suitable amount of risk for you over the next five to 10 years.

Rob West:  Yeah. And what is that downside, Mark, that someone needs to build in? You know, if they're fully invested and they want to, in a sense, kind of run through this scenario of a bear market coming into play, what should they be willing to live with on the downside, assuming they're not going to sell and they're able to wait for it to come back?

Mark Biller:  Well, the last two bear markets — of course, we don't know that the next bear market would be as severe as this — but the last two have temporarily taken stocks down on the order of 50%. Now, someone who is more diversified between stocks and bonds was probably looking at something closer to 30%. But even that is a really — you know, that's a spine tingling ride when you're on the roller coaster for real and you're watching that go down. So that's why it's so important to mentally be prepared on the front end.

Rob West:  And then finally, Mark, I know you look at everything through a biblical lens. How might you encourage somebody today who says, "Yeah, but our plans are supposed to be confident in the Lord. We should place our trust in him. Are we getting too dependent on our stock portfolios?" How do we balance that tension?

Mark Biller:  That's always something that we need to keep an eye on and hold in our hands prayerfully because it can happen. You and I both know that you can tip over into the balance of being too focused on your portfolio for your security. But I think we balance that with the biblical promises that God has to take care of us and especially, you know, scriptures like where the Lord is encouraging us to "Seek first the Kingdom" and that these other things will be added. But we obviously have a responsibility to prepare and to plan. Scripture is very clear on that as well.

Steve Moore:  Mark Biller has been our guest today. He's executive editor at Sound Mind Investing — soundmindinvesting.org is where you'll find them online. You'll also find this article, The Surprisingly Small Benefit of Perfect Market Timing. That article is available free for all of our MoneyWise Live listeners to check out today — soundmindinvesting.org.

Mark, thanks so much for joining us today. God bless you all.

Mark Biller:  Thanks!