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Friday, August 08, 2014

Market timing success equals long term failure

People just love a good story.

The story of the boy who cried wolf. The legend of Atlantis. The myth of a pot of gold at the end of a rainbow. Who can forget such great stories?  

Even though we know these are just myths, we are fascinated nonetheless.

In investing, the favorite legend is: the myth that people make money timing the market.

People love legends about investors who sold at the top and bought at the bottom. Don't confirm the facts. Don't dig into the details. It's entertainment, after all.

The reality is that people don't make money timing the market (see my most recent client letter for some background). Even assuming someone gets lucky enough to sell at the top, they never get back in until they've lost the advantage they gained in selling. Or, if they buy at the bottom, they sell too soon or too late and lose that advantage, too. Check the facts.

The people who claim to sell at the top or buy at the bottom do worse than buy and hold (as highlighted by Mark Hulbert in the Wall Street Journal, subscription required).

Why do people persist in believing the myth? It's entertaining. It makes for great cocktail party fodder. People want to believe. 

The reality is that good investing is boring. You save by spending less than you make. You invest it wisely after a lot of study. You initially look stupid. Then, over time, your wealth grows and you become financially independent.

Where's the pizzazz?! The lasers? The alien invasions? 

Nowhere to be found.

Good investing is not high entertainment. But, becoming financial independent is very entertaining.

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.

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