If you sell your holdings to buy back in at a lower level, you have to be right twice. You have to be right about that decision to sell and your future decision to buy back in.
People will say “you just need to buy back in at a lower cost.” But it’s really not that simple. Unless the market plays out to your plan perfectly, you will always be at the mercy of human psychology and will likely lose money in the long run.
Take a look at threads when SPY was at 290. People were proudly saying left and right that they have liquidated their portfolio and will buy back in when the market seems less irrational.. And that they are ok with missing out future gains.
What do you think those people are doing right now? I bet you that 50% of them have already bought back in at the higher price because their mind was yelling “if you dont get in now, you will never get back in.” The other 50% are watching the market very closely and banging their desk every time SPY ticks upwards..
And let’s say… They were right! SPY will dip back to 250. The remaiming 50% of people I talked about were technically right about their decision to sell. But the drop won’t happen overnight. It will be a multiple days or weeks process.
15% of people will actually buy back in when SPY retreats to 290 and lingers there for a few days… They will be mentally scarred after seeing SPY shoot above 300 and their only wish is to get back into the market and get rid of this stress. So at any opportunity they see, they will jump back in despite their original cost being 270.
The remaining 35% people will now breathe a sigh of relief as they watch SPY dip below their original selling price of 270.. When SPY hits 260, another 10% of people will buy back in.. All that stress and risk of forever being out of the market all for a 4% gain..
When SPY hits 250, another 10% of people will buy back in. Ok good job your timing paid off.
But how about the remaining 15%? They were waiting for SPY to hit 240… But lets say 250 was the new bottom and SPY sloely climbs back up.
Half of those people (7.5%) will watch the market go back up to 280 and buy back in after giving up. The other half will never buy back in because psychology wont allow them.
These are the scenarios that are likely to happen when you try to time the market. I say this as someone who has experienced all of the aboove during my attempt at timing the market.
If your time period is 10+ years, then the risk of selling to buy back in at a lower price is far greater than the 10% gain you might achieve by doing so… Even if the market crashes 30% again, the average investor is better off just ignoring the noise and staying in the game to guarantee that they can leap the long-term benefit of investing… Because thats where the magic really happens.
15 years from now it wont matter much if you made your initial purchase of SPY at 300 vs. 270. But what will matter is if you somehow got burned at trying to time the market and never got back in…
Disclaimer: This information is only for educational purposes. Do not make any investment decisions based on the information in this article. Do you own due diligence.