So many studies have debunked market timing as a reliable strategy for the average investor. Even Warren Buffett recommends that most investors simply buy an S&P 500 fund and hold it, rather than attempting the…
So many studies have debunked market timing as a reliable strategy for the average investor. Even Warren Buffett recommends that most investors simply buy an S&P 500 fund and hold it, rather than attempting the highly research-intensive, luck-dependent path he used to amass his own wealth.
Yet even the most ardent opponents of market timing still use some element of “timing” in their strategy. Some of it is to avoid certain quirks of market mechanics that are known to cause excess volatility. Some of it is based in sheer superstition.
Proponents of a low-cost index-based approach have the evidence on their side for long-term wealth accumulation. But that doesn’t mean all timing is totally irrelevant. Learn which types of timing are beneficial and which are not in your portfolio.
The time of day. Many portfolio managers avoid trading early and late in the day because those are often the most volatile times for several reasons. Any trades placed the night before will go through in the morning, and individual traders often react to overnight news in the morning. This can create a larger bid-ask spread than usual, meaning that you may not get the pricing you expect when placing a trade. The same often occurs in the last hour of the trading day. Automated algorithms can further exacerbate large price swings at the beginning or end of the day.
Quadruple witching Friday. On the third Friday of every March, June, September and December, four types of market hedging contracts expire, causing increased volatility and higher trading volume. For long-term investors, the effect is not really something to worry about, but you should be cautious on these days if you need to buy or sell. The last hour of these trading days is called the quadruple witching hour, and traders should be especially cautious during this time, or avoid making transactions if possible.
Friday the 13th. Historically, the S&P 500 performs worse on Fridays that fall on the 13th, and even worse on those falling in October. This is more of a coincidence than anything else, and the effect is fairly small — since 1928, Friday the 13th has provided average daily gains of 0.02 percent versus 0.05 percent on all other Fridays. It’s certainly not a reason to avoid transactions you would have made anyway. In fact, over the past 20, 50 and 100 years, October has tended to be a positive month overall, with September being regularly negative.
“Sell in May and go away.” This saying came about because of the conventional market wisdom that the May to October period tends to be slower in the market than from November to April. The idea is to be out of the market during these slower times. However, as it turns out, in most years this pattern is statistically non-existent. Jumping in and out of the market also robs your portfolio of the ability to grow and compound while it is in cash — in fact, you’re guaranteed to lose a little bit due to inflation.
The January effect. The January effect is the tendency for stocks to go up in January. Sometimes investors will try to trade around this, but as with any calendar-related hypothesis, it assumes that markets are inefficient (meaning that all available information is not priced in). It is unlikely that one month out of the year would be exempt from efficient market theory.
Timing of dividends. When buying dividend stocks or mutual funds with distributions, you must be very careful to buy before the ex-dividend date. This is the date by which you must own the asset in order to receive the dividend (if you buy it after that point, the seller gets the dividend). Why does it matter? When a fund gives a distribution or a stock gives a dividend, the price of the asset falls by the amount of the distribution. This distribution is taxable to the owner. There are two negative outcomes that can result from bad timing around the ex-dividend date.
If you buy after the ex-dividend date, the fund’s value will drop by the amount of the dividend, when it is distributed — but you only experience the loss, and will not receive the dividend. These can be significant losses, sometimes more than 10 percent.
If you buy on the ex-dividend date, you would receive the dividend — but you would also be liable for any taxes on it. Your fund would also drop by the amount of the dividend.
As the saying goes, it’s not about timing the market. It’s about time in the market. Allow compound interest to work in your favor over time, rather than making big financial decisions based on short-term factors outside your control, or silly market sayings and superstitions. That said, there are certain timing elements that could have an impact on your investments, but don’t allow them to dictate your strategy. Your long-term goals should be the driver of your financial decisions.